Itaú BBA - MEXICO – Monetary Policy Decision: preparing for reducing the easing pace

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MEXICO – Monetary Policy Decision: preparing for reducing the easing pace

August 13, 2020

We still expect the policy rate to reach 4.00% before the end of 2020

Banco de Mexico (Banxico) cut its policy rate by 50-bp (bringing it to 4.50%) as expected. The decision wasn’t unanimous as one board member voted for a 25-bp rate cut. Importantly, the statement announcing the decision carried a more cautious outlook for monetary policy, by adding that “looking ahead, the available room for maneuver will depend on the evolution of the factors that have an incidence on the outlook for inflation and its expectations, including the effects that the pandemic might have on both factors”.

The balance of risk for inflation was still labeled as uncertain, adding one upside and one downside risk for inflation. A greater persistence in core inflation was added in the list of upside risks for inflation, which also includes further depreciation of the currency and supply/demand shocks due to the outbreak. On the other hand, social distancing measures reducing demand for services was added as a source of downside risks for inflation (the list also includes downward inflationary pressures worldwide and the wide negative output gap). Moreover, while Banxico expects headline and core inflation to lay around 3% within the 12-24 month horizon, it acknowledged that the increase observed in both indexes is putting pressure on inflation expected for this year (although medium-term inflation expectations remain stable).

The balance of risks for economic activity remains significantly biased to the downside. The Board noted data point to a recovery starting in June (as the economy reopened and there was a moderate improvement in external demand), but an environment of uncertainty prevails.

We maintain our forecast for the policy rate at 4.0% before the year ends. In particular, we expect the central bank to slow the pace of rate cuts, delivering 25-bp reductions in each of the next two meetings. However, in our view risks are tilted towards a deeper easing cycle, as financial conditions have been more favorable and the output gap is wide, containing medium-term inflationary pressures.
Joao Pedro Resende
Julio Ruiz


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