Itaú BBA - MEXICO – Monetary policy decision: A split board votes to keep the reference rate unchanged

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MEXICO – Monetary policy decision: A split board votes to keep the reference rate unchanged

junio 27, 2019

We expect Banxico to deliver two 25-bp rate cuts in the last quarter of 2019

Banco de Mexico (Banxico) kept the policy rate at 8.25%, in line with our expectations and that of market analysts. The decision wasn’t unanimous, as one board member (likely Deputy Governor Esquivel, who had already been calling for a more neutral stance in central bank’s official documents) voted in favor of cutting the policy rate by 25 basis points. 

 Furthermore, the statement adopted a more neutral tone relative to the previous decision’s, as it no longer mentions that the balance of risks for inflation is tilted to the upside (although it says that a high degree of uncertainty over risks for inflation persists). While the central bank continues to mention a long list of upside risks for inflation (even adding the short-lived threat of tariffs on Mexican exports to the U.S.), it now also mentions as a downside risk the possibility of an appreciation of the exchange rate in response to monetary policy loosening abroad and greater certainty over trade relations with the U.S. (that is, USMCA approval). 

 The balance of risks for economic activity has become more uncertain and its downside bias has increased. The Board sees that slack conditions in the economy have loosened even further than expected. 

We expect Banxico to deliver two 25-bp rate cuts in the last quarter of 2019. Rate cuts in the short term are still unlikely, considering the level of both inflation and core inflation and risks surrounding the inflation outlook. However, this decision’s statement contains, in our view, changes in communication necessary before rate cuts are delivered. In this context, the probability of our baseline scenario (rate cuts starting this year, with two 25-bp rate cuts in 4Q19) has increased.

João Pedro Resende
Julio Ruiz



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