Itaú BBA - MEXICO – Monetary policy decision: On-hold; statement’s tone remained hawkish

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MEXICO – Monetary policy decision: On-hold; statement’s tone remained hawkish

mayo 16, 2019

The balance of risks for inflation continues to be tilted to the upside.

Banco de Mexico (Banxico) board members voted unanimously to leave the policy rate unchanged at 8.25%, in line with our expectations and market analysts. The Board recognizes the recent acceleration in inflation as transitory (associated to a price rise of tourism services and airfares due to Easter holidays) and believes the current policy stance is consistent with the convergence of inflation to its target within the time-frame in which monetary policy operates. 

The balance of risks for inflation continues to be tilted to the upside. Although there has been an intensification of certain downside risk factors, like the greater economic slack or lower price increases in some non-core items, there are other factors that could deviate inflation from Banxico’s foreseen path. The Board is still worried about persistence in core inflation, in addition of internal and external factors pressuring the exchange rate (and in turn inflation), the effect of the minimum wage hike in overall wage revisions (if they exceed productivity gains, which they acknowledged that in some sectors have exceeded productivity gains and could give rise to cost pressures), a deterioration of public finances and a new risk was included: that the greater slack in the economy doesn’t translate into lesser inflation pressures. 

The balance of risk for economic activity is tilted to the downside and has become more uncertain. The economy weakness observed since the 4Q18 has intensified in the 1Q19 due to external and domestic factors (some of which are transitory). 

We expect Banxico to deliver two 25-bp rate cuts in the last quarter of 2019. Rate cuts in the short term are not expected, given that Banxico’s inflation balance of risks continues to be tilted to the upside (although they recognized downside risks to inflation have intensified). 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.


Julio Ruiz



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