Itaú BBA - MEXICO – Banxico Minutes: Closing the doors for rate cuts in the near-term

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MEXICO – Banxico Minutes: Closing the doors for rate cuts in the near-term

mayo 30, 2019

Most members believe there are still significant risks for inflation, despite greater economic activity slack

The central bank of Mexico (Banxico) published the minutes of May’s meeting, held two weeks ago, when board members voted unanimously to leave the policy rate unchanged at 8.25%. Deputy governor Gerardo Esquivel, expressed a dissident opinion of the policy statement tone and the balance of risk for inflation again. He considered that the recent evolution of several inflation indicators, the change of the monetary policy stance of central banks in the developed world and the greater economic activity slack warranted a more neutral tone. He also suggested that the communication of the central bank on the persistence of inflation could be influencing inflation expectations, while also arguing that there has been no effect of the minimum wage increases on inflation.    

However, most members believe there are still significant risks for inflation (despite greater economic activity slack), which don’t allow to start a monetary policy easing cycle.  In this context, most members warned about the risks of easing monetary policy stance too soon, at a time that headline and core inflation have increased and the future path of these indicators has become more uncertain. Some members added that easing monetary policy now or signal a move in this direction would validate the recent behavior of inflation expectations, risk central bank’s credibility and create doubts over the monetary authority’s commitment with its inflation target. In this line, the majority of members agreed that the evolution of inflation expectations is an important factor to consider for monetary policy conduction. 

Some members seem to be uncomfortable with keeping a restrictive monetary policy stance for too long, given the weakness in economic activity. Specifically, they expressed that the central bank should monitor the evolution of the economy so that the tight monetary policy does not continue for too long. One of these members added that this could generate greater economic slack, lead to an excessive appreciation of the real exchange rate and to downward pressures on export activity, and attract volatile capital flows, which, in the long run, could increase the instability and vulnerability in the foreign exchange market. In all, amid weak activity and high inflation, the board is gradually becoming more polarized.

We expect Banxico to start an easing cycle only by the end of the year. We see two 25-bp rate cuts in the last quarter of 2019. Rate cuts in the short term are unlikely, given that the board still views the balance of risks for inflation tilted to the upside. Looking forward, we believe that with inflation falling within the central bank’s target range, below-potential growth, and a looser monetary-policy stance by the Fed, the central bank will have room to start a gradual normalization cycle, as long as uncertainty abates and risks for inflation fall.

João Pedro Resende
Julio Ruiz


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