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Rate cuts are unlikely before 4Q23.
22/06/2023 | Joao Pedro Resende & Julio Ruiz

Banco de Mexico (Banxico) kept unchanged its policy rate at 11.25% in a unanimous decision, in line with our forecast and market expectations (as per Bloomberg).  The monetary forward guidance included in the statement was practically unchanged (compared to May’s monetary policy communique), 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.”


Balance of risks for inflation remained tilted to the upside, while also acknowledging the inflation outlook will be complicated and uncertain. Still, the central bank recognized the disinflationary process is underway. List of risks for inflation was unchanged relative to the previous monetary policy statement. Upside risks for inflation include core inflation persistence, currency depreciation, greater cost related pressures and pressures in energy or agricultural prices. On the other hand, downside risks for inflation include greater than anticipated slowdown of the world economy, lower pass-through effect from cost related factors, better functioning of supply chains and a larger than anticipated effect from AMLO’s plan to tame inflation.


The balance of risks for activity is now neutral, from tilted to the downside as published in the most recent inflation report (released on May 31).  The statement emphasized the strong labor market.


Our end of year policy rate forecast stands at 10.75%, which implies a 25-bp rate cut in each of the last two meetings of the year (November and December).  In our view, a still concerned Board with inflation and on-going Fed rate hikes mean policy rate cuts are unlikely in the short-term. However, we believe as inflation eases more clearly towards the end of the year Banxico will start an easing cycle in 4Q23.