MEXICO – Banxico Minutes: Assessing transitory shocks to cut again

Banxico published the minutes of its February monetary policy meeting, where the Board unanimously kept the policy rate at its current level of 7%. The central theme in the Board members’ remarks was their assessment of the shock from the increase in excise taxes and goods tariffs on inflation at the margin. There was consensus that this shock is indeed transitory and that, so far, no second‑round effects have been observed. However, the main reason behind the February pause was the need for more information from upcoming inflation prints to confirm this assessment. In any case, the appreciation of the MXN, the slack present in economic activity and the labor market, and the Board’s view of anchoring in inflation expectations lead several members to believe it is appropriate to continue cutting in future meetings.

In an interesting twist, the minutes include Heath’s dissident opinion regarding the statement. Even though Heath voted for a hold in the decision, along with the rest of the Board, Heath dissents on aspects in the statement, inclined to maintain the “upside bias” to inflation forecasts (rather than being “more balanced”), as well as the omission of key arguments to justify the hold decision (deterioration of inflation dynamics and large errors in inflation forecasts). Finally, in a key development in our view, Heath dissented on eliminating the “for the moment” text in the forward guidance, as it suggests it would be interpreted as a premature cut in the upcoming decisions.

Our view: Although there are no clear signals pointing to a rate cut in March, we see that the Board maintains its implicit intention to continue lowering rates in upcoming meetings, once its assessment of the transitory nature of recent price shocks and the absence of second‑round effects is confirmed. We expect Banxico to cut to 6.75% in May, although benign inflation prints prior to the March decision could lead them to jump the gun and cut in March. Now all eyes point to Banxico’s Monetary Policy Report, to be published on February 26.