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We expect one additional 25-bp rate hike in May

The central bank of Mexico (Banxico) released the minutes of March’s monetary policy meeting, in which board members unanimously voted to hike the policy rate by 25-bp to a level of 11.25%. Similar to the monetary forward guidance included in the corresponding statement (“For its upcoming decision, the Board will take into account the inflation outlook, considering the monetary policy stance already attained”), members are not closing the doors for an additional rate hike dependent on data evolution.


Two members are concerned on core inflation (in particular the rise of the services component), emphasizing its evolution will be key for the upcoming decision.  One member noted that despite the positive performance of inflation, domestic pressures persist with an upward dynamic in services CPI. Domestic pressures are associated to solid consumption growth, cost related pressures stemming from the labor market and high inflation expectations. The same member noted services CPI will be key for upcoming decisions. Other member sustained it is time to focus on tacking domestic-related pressures, especially on services prices. The member noted that in the upcoming decision it will be determined whether the evolution of data allows to confirm the level of 11.25% as the terminal rate or an additional adjustment is required.


Other members seem less concern on inflation, but they don’t completely close the doors for an additional rate hike, in our view. One member added that the performance of core inflation has been in line with forecasts and at the margin, a deterioration in inflation dynamics is not perceived, although they remain complex. Other member noted that in the current conditions and in the absence of additional and significantly adverse shocks, the policy stance attained will allow to maintain inflation expectations anchored, will avoid second-round effects on price formation, and will be adequate for inflation to converge to the target. A third member stated that with the monetary policy stance achieved, it will provide room to evaluate the effects of the significant reference rate increase, so that, in the absence of new shocks, looking ahead it would be convenient to maintain the monetary policy stance.


Looking forward, two members emphasized keeping the monetary restrictive stance once the terminal policy rate is achieved. In a dissident opinion, deputy governor Irene called for including in the forward guidance that the monetary policy stance must remain restrictive for 2 years to achieve inflation convergence to the target. Other member, emphasized that a restrictive monetary policy stance should be maintained with an ex-ante real interest rate of around 7%, considering that the reduction in expected inflation is reflected in increases in the ex-ante real interest rate.


Our base case is for the central bank to hike one more time its policy rate by 25 bps (to a terminal rate of 11.50%), contingent on the evolution of inflation (particularly core inflation). Looking ahead, we think that the central bank will not start cutting rates until the first half of next year.


Joao Pedro Resende

Julio Ruiz