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 included in the statement was the same (compared to June’s monetary policy communiqué), suggesting rate cuts in the short-term are unlikely: “[the board] considers that it will be necessary to maintain the reference rate at its current level for an extended period.”
While the appreciation of the currency was added to the list of downside risk for inflation (excluding now a better functioning of supply chains), the balance of risks remained tilted to the upside. Other downside risks for inflation include greater than anticipated slowdown of the world economy, lower pass-through effect from cost related factors and a larger than anticipated effect from AMLO’s plan to tame inflation. On the other hand, upside risks for inflation include core inflation persistence, currency depreciation, greater cost related pressures and as well as energy and agricultural prices.
Banxico’s core inflation forecast path was revised slightly upward in the short term. Quarterly annual headline inflation for 3Q23 was reduced 30 bps to 4.7%, but core inflation was increased 10-bp in each of 4Q23,1Q24 and 2Q24. Both headline and core inflation are still expected by the central bank to converge to the 3% target in 4Q24.
Overall, the statement reflected a still cautious board on the disinflationary process, consistent with no rate cuts in the short term. In our view, Banxico is unlikely to change the monetary policy stance in the September meeting, but as inflation eases more clearly towards 4Q23 they will start considering rate cuts. Our base case is a 25-bp rate cut in each of the last two meetings of the year (November and December), implying an end of year policy rate of 10.75%.