Itaú BBA - MEXICO – Monetary Policy Minutes: Hikes more likely than cuts in the near-term

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MEXICO – Monetary Policy Minutes: Hikes more likely than cuts in the near-term

July 6, 2017

Bar for additional rate hikes is high, but further tightening is not completely off the table

The minutes of the most recent policy rate decision in Mexico confirmed the message in the statement: the bar for additional rate hikes is high, but new rate increases are not completely off the table given the still challenging environment for inflation.

As expected two board members continue to call for additional rate increases. They believe that the balance of risks is still tilted to the upside. One of them believes that second-round effects are materializing, arguing that the correlation between the inflation rates of items in the CPI basket continues increasing.

When discussing future policy decisions, the majority of members - who opted to include in the statement that the 7% policy rate level is consistent with bringing inflation to the target (signaling that the cycle is likely over) – thinks there is room to “pause” in the cycle (which is much weaker wording than “end of the cycle”) given that inflation is evolving in-line with forecasts. This suggests to us that the majority would be open for new rate increases depending on inflation deviations from the path projected in the most recent inflation report. 

Surprisingly, even the most dovish board member is not ruling out rate hikes. It is interesting to note that even the board member who voted to keep the policy rate on-hold mentioned the possibility of new rate increases and commented that it could be difficult to implement the rate cuts that markets are expecting for 2018 considering the uncertainties associated with the presidential elections next year.

Our base-case scenario is that Banxico will take a cautious approach, amid Fed rate hikes and uncertainty over presidential elections next year, so the board will likely remain on-hold for long. All-in, by reading the minutes it seems that there is no appetite for rate cuts in the near-term, and we cannot completely rule out additional rate hikes (but that would require more meaningful deviations of inflation from the path projected by the central bank). Overall, our take is that given that policymakers do not see the current real interest rate level as tight and considering that we expect the economy to be growing at a decent pace in early 2018, there would be no urgency for monetary easing. We see rate cuts starting only in the second half of next year.


João Pedro Resende

Alexander Müller


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