Itaú BBA - MEXICO – Monetary Policy Minutes: no rate cuts in the horizon, but divisions within the board are...

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MEXICO – Monetary Policy Minutes: no rate cuts in the horizon, but divisions within the board are...

February 21, 2019

Most members considered PEMEX financial situation as a risk for macroeconomic conditions

The central bank of Mexico (Banxico) published the minutes of February’s meeting, held two weeks ago, when the board members voted unanimously to leave the policy rate unchanged at 8.25%. As in the statement, the minutes show all board members agree that the balance of risk for economic activity is tilted to the downside. 

However, board members dissent on the outlook for inflation. The minutes reflect three members have a more cautious view about inflation outlook, while the other two seem less concerned, influenced by activity weakening and recent downside surprises on inflation. In this context, most members considered that the balance of risk for Banxico’s inflation outlook is still tilted to the upside. However, one member said that the balance of risk for inflation is only slightly tilted to the upside, while another said the scenario for inflation is more benign than in the previous decision. We recall this is the first meeting attended by the two recently-appointed board members. 

In this context, disagreement on the policy rate outlook seems to be emerging, with most board members holding a more conservative view. One member said that a tight monetary policy should be maintained for a prolonged period of time, while another member mentioned that the board should focus on the convergence of inflation of the target, not ruling out additional interest rate hikes, strengthening central bank’s credibility. A third member reinforced that the communication of the central bank should reflect the persistence of inflationary risks, rather than activity weakness, calling attention to the fact that core inflation has been sticky despite a tight monetary policy. On the other hand, one board member warned that that a tight monetary policy shouldn’t be sustained for long, if the output gap keeps widening significantly.   

Most members considered PEMEX financial situation as a risk for macroeconomic conditions (further rating downgrade and its effects on domestic markets). However, these members mentioned that support for Pemex should not come at expense of deteriorating public finance targets. 

We expect the central bank to keep the policy rate unchanged throughout this year. Amid a still-high inflation and domestic and external (mainly approval of USMCA in the U.S. congress) uncertainties, we think that rate hikes in the short-term are more likely than cuts. However, with inflation falling within the target range and growth below potential, a dissipation of uncertainties would allow the central bank to start a gradual normalization cycle (so we expect three 25-bp rate cuts in 2020).  
 

João Pedro Resende
Julio Ruiz



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