MEXICO – Monetary Policy Minutes: future rate hikes contingent on inflation data

We expect Banxico to hike its policy rate by 25-bps in August amid inflationary pressures

João Pedro Resende & Julio Ruiz


The minutes of June’s monetary policy meeting, in which the majority of board members voted to increase the policy rate by 25-bps to 4.25%, revealed board members Gerardo Esquivel and Galia Borja voted to keep the policy rate unchanged.  Both board members argued that shocks affecting inflation came from the supply side (and are transitory) and that monetary policy can do little to address them, also labeling the decision as unpredictable. In addition, Esquivel argued the decision could send a wrong message, suggesting that shocks to inflation are permanent (affecting inflation expectations).

Future rate hikes are contingent on future inflation behavior. Of the members supporting the rate hike, one of them mentioned that the decision does not necessarily imply the beginning of a monetary tightening cycle and that future decisions will be data dependent, while other member highlighted that given the uncertainty and balance of risks for inflation tilted to the upside, the central bank should act firmly to avoid a de-anchoring of inflation expectations. In contrast, one of the members who voted to keep the policy rate on-hold noted that up to that point inflation expectations were contained but suggested that if they deteriorated he/she could back a rate hike.

Regarding the balance of risks for inflation, most members considered it is biased to the upside. One member noted that while the short-term balance of risk for inflation deteriorated significantly, medium-term risks have improved (albeit remaining high). Another member highlighted the balance of risk for non-core inflation are also biased to the upside due to commodity food and energy prices and pressure from agricultural prices.

We expect Banxico to deliver two additional interest rate hikes of 25-bps this year (reaching a level of 4.75%), with the next rate hike on August 12 amid increasing inflationary pressures.  In our view, Banxico will likely opt to hike the policy rate sooner rather than later to keep inflation expectations contained amid high current inflation.

Joao Pedro Resende
Julio Ruiz