Itaú BBA - MEXICO – Monetary policy decision: In a split decision, the easing cycle begins

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MEXICO – Monetary policy decision: In a split decision, the easing cycle begins

agosto 15, 2019

We now see the policy rate ending this year at 7.25%

Banco de Mexico (Banxico) cut the policy rate by 25 basis points, bringing it to 8.00%, below our forecast and that of most market participants (as per Bloomberg). The decision wasn’t unanimous, as one board member voted to maintain the policy rate at 8.25%. We note the minutes from the previous meeting suggested there could be at least two votes for leaving the policy rate unchanged this month, given these members’ more cautious view on the balance of risks for inflation and the evolution of CPI since then.  

The statement reflected a more balanced risks for inflation, but still with a high degree of uncertainty. Compared to the last monetary policy decision, most of the upside (persistence of core inflation, currency depreciation due to external and internal factors, increase in nominal wages, further tariff threats and weak public finances) and downside (appreciation of the currency due to easing of global monetary conditions or lower uncertainty in trade relations with the US, widening of the output gap and lower non-core prices) risks for inflation were kept. However, the statement added to the downside risks list the effect from falling non-core inflation (in particular energy prices) on core inflation. Moreover, the statement  dropped the upside risk of persistence in inflation expectations due to sticky core inflation.

The Board seems to have diverted away their focus from core inflation to justify the policy rate level (as was the case in past monetary policy decisions). To justify this month’s decision, the board considered the fall in headline inflation (as foreseen by Banxico), the greater than expected output gap widening and the behavior of external and internal yield curves. The Board repeated that it will be dependent on incoming information (will follow closely the currency pass through, relative monetary policy stance with the Fed, slack conditions and cost related pressures) to adjust its monetary policy stance. 

We now expect Banxico to deliver three additional 25-bp rate cuts in 2019 (bringing it to 7.25% by the end of this year). Previously our forecast for the policy rate for the yearend was 7.5%. The wording of the decision leaves the central bank with enough degrees of freedom to cut or maintain the policy rate over the next decisions. However, given the poor evolution of the global economy and its impact on the Fed and on Mexico’s economic activity, we think there is no reason to intercalate the cycle with pauses at this point.

João Pedro Resende
Julio Ruiz

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