MEXICO – Monetary Policy Minutes: Risks of a pause in the short-term

One board member who backed a rate hike is considering the possibility of a pause

Julio Ruiz


The minutes of August monetary policy meeting, in which the majority of board members voted to increase the policy rate by 25-bps to 4.50%, revealed dissenter voters (who backed keeping the policy rate unchanged), Gerardo Esquivel and Galia Borja, supported their decision on the view that current inflationary pressures are transitory forces that shouldn’t be addressed through monetary policy. Thus, in our view both members are unlikely to vote for rate hikes in the short-term, also considering the rate increases already implemented. Having said that, Galia Borja seems to be advocating for a more gradual approach for rate hikes than priced in by the market and noted the eventual tightening of international financial and monetary conditions (as the Fed reduces asset purchases) as an important variable to monitor, hinting she could back rate hikes at some point.

Among the three members who voted to increase the policy rate, one of them is considering a pause looking ahead. He argued that the new monetary policy stance may be enough for the time being and further rate adjustments will be data dependent. On the other hand, one member argued that Banxico must act now to avoid sharper adjustments in the future with greater activity costs, while other member said that maintaining an accommodative monetary policy stance and tolerating high inflation levels well above target could lead to a de-anchoring of inflation expectations and erode Banxico’s credibility.

Regarding the balance of risks for inflation, most members considered it is biased to the upside. Some members noted as downside risks for inflation the effects stemming from the negative output gap, additional social distancing measures and the appreciation of the peso. On the other hand, some members noted external inflationary pressures and additional cost pressures as upside risks.

Our base case scenario is for another 25-bp rate hike in the next meeting in September (once again in a 3x2 split vote) given the still challenging environment for inflation. However, we note the odds of a pause are higher than those of an acceleration pace at least until the Fed starts to taper. We expect an end of year rate of 5.25%, which implies a 25-bp rate hike in the three remaining meetings of 2021.

Joao Pedro Resende
Julio Ruiz