MEXICO – Monetary Policy Decision: normalization cycle continued with higher inflation forecasts

The convergence of inflation to the central bank target was further delayed

Julio Ruiz


Banco de Mexico (Banxico) increased its policy rate by 25-bps to 4.50%, in line with our forecast and market expectations (as per Bloomberg). The decision was split as two board members (Galia Borja and Gerardo Esquivel) voted to keep the policy rate unchanged at 4.25%. The central bank argued that while shocks that have affected inflation are expected to be transitory, the monetary adjustment was necessary to keep inflation expectations contained. The statement didn’t include a clear forward guidance: future rate adjustments will depend on the evolution of inflation drivers.

The statement reflected a more concerned Board with inflation outlook. The central bank from now on is including an update of its inflation projections in the monetary policy statement, which this time shows higher headline inflation for 4Q21 (5.7%, from 4.8% in the most recent inflation report) and 4Q22 (3.4%, from 3.1%). Likewise, core inflation for 4Q21 and 4Q22 increased to 5.1% (from 3.9%) and 3.3% (from 3.2%), respectively. The new path also reflects a further delay in the convergence of inflation to the 3% target which now is expected in the 1Q23 (compared to a convergence in 3Q22 in June’s statement and 2Q22 in the most recent inflation report).

The list of upside and downside risks for inflation remained unchanged (relative to the previous statement), with balance of risk for the new inflation forecasts tilted to the upside. Upside risk for inflation includes external inflationary pressures, cost-related pressures, core inflation persistence, exchange rate depreciation and increases in agricultural products. Meanwhile downside risk for inflation include a larger than expected negative output gap, tighter social distancing measures and currency appreciation.

We expect the policy rate at 5.25% by the end of this year, with Banxico hiking its policy rate by 25-bps in each of the meetings scheduled during the rest of the year (September, November, and December). Higher Banxico’s inflation projections in the short term are consistent with further rate hikes, also helping to keep inflation expectations contained.

Joao Pedro Resende
Julio Ruiz