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Our base case remains for another rate cut in May.
2024/04/04 | Andrés Pérez M. & Julio Ruiz



The central bank of Mexico (Banxico) released the minutes of March's monetary policy meeting, in which the majority of board members voted for cutting the policy rate by 25-bp (to a level if 11.00%), as expected.  The minutes revealed that deputy governor Irene Espinosa, who voted to keep the policy rate unchanged, is still uncomfortable with the inflation outlook. She noted the still tight labor market and positive output gap despite the restrictive policy stance. She also noted lingering risks to inflation: pressure from wage increases and expansionary fiscal policy.   Furthermore, in her view, the fact that markets anticipate that inflation will be higher than Banxico’s forecasts indicates that it was premature to begin reducing the restrictiveness of monetary policy.

 

On the other hand, the rest of the Board members were open to consider further rate cuts depending on the incoming data, but with one of them with a bias to pause. Three board members argued that the restrictive stance attained is not consistent with the progress in the disinflationary process, but still two of them noted they do not rule out pauses. The other member, (likely deputy governor Jonathan Heath) mentioned that there is some space to do a fine-tuning adjustment to the policy rate now, but it is not time to start an easing cycle given still present risks to inflation. In his view, the real ex ante rate should be in the 7-7.5% range  (before the meeting it was at 7.43% and currently it is at 7.10%).  Still, he didn’t completely discard another rate cut in the next meeting, noting he would need to have more clarity inflation is converging to the target.

 

Our take: In our view, most Board members (at least three of them) seem open to continue the easing cycle arguing that the current restrictive stance attained is not consistent with the progress of the disinflationary path. Assuming activity weakness remains and core inflation continues easing (specially services inflation more clearly), we expect another rate cut of 25-bp in the May monetary policy meeting. Our base case remains for a 25-bp rate cut in each of the monetary policy meetings of the year, reaching an end of year level of 9.50%. We have three more biweekly inflation prints before May’s 9 monetary policy meeting and February’s monthly GDP figure and 1Q24 Flash GDP estimate.