Banco de Mexico (Banxico) unanimously maintained the policy rate at 11.25%, in line with our forecast and market expectations (as per Bloomberg). The monetary forward guidance was changed slightly with a dovish bias: the reference rate must be maintained at its current level “for some time” instead for an “extended period”. Also, the statement (relative to the previous one) is not emphasizing services inflation being affected by shocks in an environment where economic activity is more resilient than previously anticipated. The central bank recognized that while the inflation outlook remains complex, progress on disinflation has been made.
Still, the balance of risks for inflation remained tilted to the upside. Upside risks to inflation include, persistence of core inflation, currency depreciation, greater cost related pressures, a greater than expected resilience of the economy and pressures on energy or agricultural prices. On the other hand, downside risks for inflation include greater than anticipated slowdown of the global economy, lower pass-through from cost related factors and the appreciation of the currency.
The headline inflation forecast path was marginally increased in the short term (relative to the September’s monetary policy decision), while core inflation remained unchanged. Headline inflation for the 4Q23 is now at 4.4% (previously at 4.7%), likely recognizing softer rebound from non-core food prices. Headline inflation forecast for 4Q24 stood unchanged at 3.4%. Core inflation for 4Q23 and 4Q24 stood also unchanged at 5.3% and 3.3%, respectively.
We kept our call of the central bank beginning their monetary easing cycle with a 25-bp rate cut in May’s 2024 policy decision. Despite a more dovish tone in the statement, we think that still persistent services inflation, resilient activity, which will likely continue next year amid an expansionary fiscal stance, and tight external conditions will lead the central bank to cut its policy rate until the beginning of 2Q24. Our end of 2023 and 2024 policy rate forecast is at 11.25% and 9.00%, respectively.