Itaú BBA - MEXICO - Monetary Policy Minutes: Not Ready to Decouple From the Fed

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MEXICO - Monetary Policy Minutes: Not Ready to Decouple From the Fed

April 12, 2017

The minutes do not indicate that the majority of the board is ready to put an end to the cycle yet.

The minutes of the most recent monetary policy decision in Mexico revealed that the board unanimously voted to reduce the pace of interest rate hikes to 25 bps. While the appreciation of the Mexican peso and the monetary tightening implemented so far leave the central bank in a more comfortable position, the minutes do not indicate that the majority of the board is ready to put an end to the cycle yet.

Most board members acknowledge that, in spite of the recent exchange rate appreciation, the main challenge for the central bank is to contain second-round effects. However, these same members highlighted that monetary policy has a lag effect on prices and that the 325-bp rate increase implemented since 2015 “has generated an appropriate stance to deal with the shocks.” In this context, some board members mentioned the increase in the interest rate differential with the U.S., with one of them suggesting that Mexico might not need to follow the Fed ahead. However, two members were more cautious, indicating that new interest rate hikes will probably be necessary, with one of them saying that Mexico should hike at least as much as the Fed does.

As in the statement, the board highlighted that the balance of risks had not deteriorated since the previous meeting. Still, the minutes add the board’s view that  the balance of risks is tilted to the upside. While the central bank doesn’t expect demand-side pressures, all board members agreed that the labor market has tightened significantly, with some board members estimating the output gap is close to zero, with a possible drop in potential growth. One member noted the risks related to misinterpreting the cyclical position of activity under the current circumstances (high inflation and zero output gap).

We expect Mexico’s central bank to continue hiking with the Fed for now. We see two additional rate hikes this year, after each of the next two expected Fed hikes. Beyond that, depending on the evolution of inflation and the exchange rate, the central bank will likely end the cycle.


 

João Pedro Resende


 

 



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