Itaú BBA - MEXICO – Banxico Minutes confirm a divided board with growing odds of a rate cut in 3Q19

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MEXICO – Banxico Minutes confirm a divided board with growing odds of a rate cut in 3Q19

julio 11, 2019

The majority of board members are still concerned about the evolution of core inflation

The central bank of Mexico (Banxico) published the minutes of June’s meeting, held two weeks ago, when four out of five board members voted to leave the policy rate unchanged at 8.25%. As widely expected, deputy governor Gerardo Esquivel was the member who voted for a 25-bp cut, arguing that inflation is in a convergence path to Banxico’s inflation target. Moreover, the change of the monetary policy stance of central banks in the developed world and the greater economic activity slack warranted a 25-bp cut, according to him. 

The minutes show there are divisions even within members who voted to leave the policy rate unchanged. Two board members are not open to cut rates until inflation shows a clear trend towards the central bank target. Likely the same board members expressed that the balance of risks for inflation is still tilted to the upside (although one of them clarified that the upside bias applies to core inflation). On the other hand, two members (one of them likely being Esquivel) hinted that Banxico should react to a rate cut by the Fed (which is likely in July) to prevent monetary conditions to tighten further.  

The majority of board members are still concerned about the evolution of core inflation. The majority of board members mentioned it is essential that core inflation resumes its downward trend. Two of those board members expressed their concern about the level of inflation expectations, with one of them saying it reflects a lack of credibility of the central bank actions. 

In all, the minutes suggest higher odds of central bank cutting rates in 3Q19. Although two votes for a rate cut are likely in August meeting, the minutes suggest core inflation needs to fall before the majority of board members feel comfortable in starting an easing cycle. 
 

João Pedro Resende
Julio Ruiz



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