The central bank of Mexico (Banxico) released the minutes of August's monetary policy meeting in which most board members voted for cutting the policy rate by 25-bp (reaching a level of 10.75%). The minutes revealed the arguments of deputy governors Irene Espinosa and Jonathan Heath that voted for keeping the policy rate unchanged in August. Ms. Espinosa argued that foreign exchange volatility could intensify due to domestic and external factors, jeopardizing the disinflationary process even considering the anticipated slowdown in economic activity. Likewise, Mr. Heath argued that the rate cut decision would undermine the central bank’s credibility. In his view, voting in favor of easing the monetary policy stance at the time, given a high fiscal deficit and a yet-to-be confirmed weakness of economic activity, while inflation is still far from target, may be interpreted as premature if there is no certainty that inflation is on track.
On the other hand, the rest of board members seem willing to consider a rate cut in the next monetary policy meeting. One board member argued that the inflationary environment will allow to continue discussing reference rate adjustments but acknowledged that a gradual approach will need to be maintained. Another member noted that the difference between the interest rate gap and the inflation gap is one of the highest among the main emerging economies and is the largest if core inflation is considered. Looking forward the member thinks it is appropriate to continue with a data-dependent approach in which gradualism prevails, but not ruling out pauses between cuts and not proportional to the expected decline in inflation for the remainder of the year. Finally, a third member downplayed the currency depreciation risk given a low passthrough to prices and weak activity having the opposite effect on inflation. The same member argued that reference rate cuts aligned with the central scenario must not be postponed, as there is the risk of managing monetary policy with a lag, incurring unnecessary costs for the economy.
Our take: At least three board members seem willing to consider a rate cut in the next monetary policy decision (September 26). While deputy governor Heath was very critical of Banxico cutting the policy rate in the August meeting, a recent interview suggests more willingness to consider a rate adjustment in the next meeting. Our base scenario is for the central bank of Mexico to cut the policy rate by 25-bp in each of the remaining meetings of the year, reaching an end of year level of 10.00%. Our call has a risk of another pause if persistent market volatility episodes emerge stemming from the domestic or external scenario.