The central bank of Mexico (Banxico) released the minutes of September’s monetary policy meeting, in which board members unanimously maintained the policy rate unchanged at 11.25%, as expected. All Board members expressed a cautious tone on the disinflationary outlook, also emphasizing the nominal policy rate must remain unchanged for a prolonged period.
Two board members seem more hawkish than the rest, emphasizing fiscal risks to the inflation outlook. One board member noted next year’s fiscal package could generate pressures on aggregate demand (and inflation) and if the contemplated fiscal consolidation process is not achieved for 2025 consequences for inflation outlook could be even greater. In view of a more complex inflation outlook, the same member added that a restrictive stance will be maintained for a more extended period than the previously foreseen, without discarding expanding the restrictive stance actively (through higher nominal rates). Another member noted the desynchronization between the restrictive monetary and expansionary fiscal policies. The materialization of (1) the effects from the fiscal stimulus on aggregate demand in 2024 and (2) if the 2025 anticipated fiscal consolidation is not achieved could require tight monetary policy for a longer period. The same member added that the nominal interest rate should remain fixed for the rest of the year, with the possibility of extending the pause beyond the 1Q24.
While all members agreed that the balance of risks for inflation remains tilted to the upside, some members noted it has deteriorated since the previous monetary policy meeting. Only one board member noted it has remained unchanged, in his view.
All in all, the minutes hawkish tone increases the odds of delaying the first rate cut from our base scenario in 1Q24. Our end of this year and next year policy rate is at 11.25% and 8.75%, respectively.
Andres PerezJulio Ruiz