Itaú BBA - MEXICO - Monetary policy minutes: a bit more hawkish

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MEXICO - Monetary policy minutes: a bit more hawkish

February 23, 2017

The minutes show tougher language on inflation; we expect Banxico to take the reference rate to 7.0% in 2017.

The Central Bank of Mexico published the minutes of February’s monetary policy meeting, in which the Board decided to increase the policy rate by 50-bps (to 6.25%), indicating that the decision was unanimous. February’s statement added a new sentence which reads: the board “will deliver the hikes that are necessary in 2017”, whereas previous statement did not make such explicit reference to future moves. So we were expecting the minutes to shed more light on these views. Our takeaways are the following.   

The minutes show tougher language on inflation. February's statement had already mentioned that the balance of risks on inflation had deteriorated further. But the minutes provide more details. For instance, all board members agreed that inflation expectations have increased, in contrast with previous communications (where the talk revolved around the idea that only short-term inflation expectations had increased, because of the temporary shocks). Moreover, some board members pointed out that diffusion indices are increasing (that means, there is a larger share of items in the CPI basket with higher inflation). The board also discussed the possibility of observing higher exchange rate pass-through, which is a key risk for the outlook. One board member, in fact, stated that, given the recent deterioration of the inflation outlook, a "strong monetary policy response in indispensable”.

The board believes that activity is heading to a slowdown. Most believe that the deterioration of bilateral relations with the US will hurt investment, and that private consumption will also suffer a slowdown. Some board members highlighted that consumer confidence fell to a historical low in January 2017. The uncertainty regarding possible changes in U.S. policies (trade, tax, immigration) appears at the top of the list of downside risks on activity, as discussed in the minutes.

We expect Banxico to take the reference rate to 7.0% in 2017, with three 25-bprate hikes following each move of the same magnitude by the Fed. The preemptive (and aggressive) adjustment of monetary policy (325-bps since December 2015) suggests that the board will not hesitate to tighten monetary policy, if the inflation outlook deteriorates more. And we already know, from previous communications, that some board members think it is possible to decouple from the Fed. Considering the CPI print published today (which shows a significant increase in core inflation)  and the board’s attention devoted to inflation and inflation expectations, it will be hard to stop hiking. Thus, the risks are tilted towards delivering more rate hikes. 


Alexander Müller 



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