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The Board expects a more gradual decline in inflation.
2023/09/28 | Andrés Pérez M. & Julio Ruiz

Banco de Mexico (Banxico) unanimously maintained the policy rate at 11.25%, in line with our forecast and market expectations (as per Bloomberg). The forward guidance included in the statement remained unchanged (compared to August’s monetary policy communiqué): “[the board] considers that it will be necessary to maintain the reference rate at its current level for an extended period”


The Board estimates a more gradual decline in headline and core inflation, with a cautious tone on services inflation amid better than anticipated economic activity.  Quarterly annual headline inflation for 4Q24 rose 30 bps to 3.4%, while core inflation increased 20-bp to 3.3%. Both headline and core inflation are expected by the central bank to converge to the 3% target in 2Q25 (previously was expected in 4Q24).  


Balance of risks for inflation remained tilted to the upside. While no mention of upside risks for inflation from the 2024 fiscal budget was added (large primary deficit of 1.2% of GDP is expected), they included the risk that the economy’s resilience contributes to a more gradual decline in inflation than foreseen. Other upside risks for inflation in the statement are core inflation persistence, currency depreciation, greater cost related pressures and as well as energy and agricultural prices. Downside risks for inflation include a greater than anticipated slowdown of the global economy, lower pass-through from cost related factors and the appreciation of the currency. A larger than anticipated effect from AMLO’s plan to tame inflationary pressures was scrapped from the downside risks for inflation list, relative to the previous statement.


While the statement provided a similar forward guidance (as previous statements), in our view it had a more hawkish tone at the margin, as reflected in the changes of the balance of risks for inflation and upward revisions in their inflation forecast path. We think the chances of delaying rate cuts until the beginning of next year are increasing, also considering fiscal risks next year.