We expect Banxico to slow down the pace of rate hikes in the March meeting
The central bank of Mexico (Banxico) released the minutes of February’s monetary policy meeting, in which board members unanimously voted to hike the policy rate by 50-bp to a level of 11.00%, surprising market expectations of 10.75%. Similar as the statement, board members expressed concerns about the evolution of core inflation, which was one of the main reasons behind their decision.
Three board members seem more willing to slow down the pace of rate hikes in the coming meeting. One member argued the pace of adjustments of the reference rate could be modified, and that the central bank is very close to reaching a level that is appropriate to consolidate a disinflationary process. Other member considered that given the notably restrictive level attained by the ex-ante real interest rate, the balance of risks for inflation will be compatible with a slower pace of adjustments in future monetary policy decisions. A third member added that it should be communicated that the central bank is currently close to reaching the terminal rate.
Still, keeping the rate hike pace in the next meeting is not completely discarded. Board members emphasized the forward guidance provided by the statement, which suggests further rate hikes of a lower magnitude, is not a commitment. One member highlighted that the forward guidance is data-dependent and that it does not represent an unwavering commitment, while other member noted that looking ahead decisions must remain flexible, dependent on data. A third member highlighted the importance of being extremely cautious when communicating the forward guidance, considering that it does not represent a commitment. One of these members is Irene Espinoza, who added a dissident opinion in the minutes, calling for not including a forward guidance which limits the next policy decision to a lower rate hike and could imply a high and costly risk of correction if data doesn’t evolve as expected.
While the minutes suggest keeping the hiking pace (of 50-bp) is not completely discarded, we think that recent inflation evolution is consistent with a 25-bp rate hike in March. Our terminal policy rate forecast is at 11.50%, which implies two 25-bp rate hikes more (March and May). Looking ahead, we think that the central bank will only start cutting rates during the first half of next year.
Joao Pedro Resende