MEXICO – Monetary Policy Minutes: a more concerned board over inflation is unlikely to pause soon

There is a possibility of accelerating the pace of hiking rates if inflation outlook deteriorates further

Joao Pedro Resende & Julio Ruiz


The minutes of September monetary policy meeting, in which most board members voted to increase the policy rate by 25-bps to 4.75%, revealed the only dissenter voter (who backed keeping the policy rate unchanged), Gerardo Esquivel, supported his decision on the view that monetary policy is an inefficient tool to tame inflationary pressures originated from supply shocks. He also argued that rate hikes will affect domestic demand, public finances, reduce the future room for the time when the Fed begins its normalization process and could be interpreted as a signal of permanent inflation pressuring inflation expectations. On the other hand, the rest of members seem to be more worried about deteriorating inflation expectations.

Two members are clearly calling for further rate hikes, with one of them explicitly mentioning the possibility of discussing the pace of monetary policy normalization. One member noted that inflation expectations for 2021 and 2022 have deteriorated, which has led to the expectation of further reference rate increases. The same member added that if inflation continues to increase the expansionary monetary policy stance will have to be reduced until a neutral or even slightly restrictive stance is achieved. Another member added that the appropriate pace for withdrawing the monetary policy stimulus must be evaluated to avoid a scenario of exchange rate depreciation and an acceleration in the pace of price increases, highlighting also that a more complex inflation scenario, which is very likely, would require a more aggressive adjustment under a preemptive approach.

A fourth member highlighted that increasing inflation expectations point to a reduction of monetary policy stimulus. A fifth member sounded more dovish, noting that it is important to differentiate between a cycle of interest rate increases and a reinforcement of monetary policy, with the later helping to act preemptively in light of less accommodative global monetary conditions in the following months and higher inflation expectations. The same member added that the neutral rate range may have adjusted downwards as a consequence of the pandemic.

All in all, the minutes have a more hawkish tone than before, as - unlikely in the previous meeting - the majority of board members does not mention the possibility of a pause in the near term (in the previous meeting one board member within the three-member group voting for hikes raised this possibility) and two board members seem open to act more aggressively. Thus the minutes discard a scenario of a pause - at least until yearend, when there will be a change in the command of the central bank - while the possibility of accelerating the rate hike pace to 50-bps if inflation outlook deteriorates further seems on the table. We continue to expect two 25-bp rate increases this year and expect the policy rate to reach 6.0% in 2022.

Joao Pedro Resende
Julio Ruiz