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We expect the easing cycle to begin in March.
2024/01/04 | Andrés Pérez M. & Julio Ruiz

The central bank of Mexico (Banxico) released the minutes of December's monetary policy meeting, in which the board unanimously maintained the policy rate at 11.25%, as expected.  All members seem to be open to discuss a rate cut in the next meetings, but without additional (explicit) information to clearly infer if the first rate cut could come in the February or March meeting.


Three of the five board members seem to be on the cautious side when considering a first rate cut, in our view.  While one member acknowledged significant progress in the disinflationary process, the member noted there challenges remained and that caution must be exercised when evaluating the possibility of lowering the reference rate during the 1Q24 meetings. Another member expressed concern on several factors (resilience of economic activity, persistence of core inflation, inflation expectations not declining to required levels, procyclical fiscal policy, new depreciation episodes, among others) that could hinder the disinflation path towards the 3% target. The same member noted that the reference rate will likely need to remain at its current level for a longer period than expected by markets. A third member also noted tight cyclical conditions, emphasizing caution should be maintained so as to avoid easing prematurely. On the other hand, the same member warned that the real ex-ante rate should not exceed 7-7.5% (currently at 7.28%), avoiding an excessively restrictive stance. 


The other two members emphasized progress of the disinflationary process, also mentioning the possibility of a rate cut in the next meetings.  One member noted that the communication should allow for sufficient flexibility in each policy meeting. The other member mentioned that there were conditions to begin discussing the possibility of a rate cut.


In our view, the easing cycle will likely begin in March with a 25-bp cut. Lingering upside risks to inflation from an expansionary fiscal stance, persistence in services inflation and another large minimum wage hike, suggest pauses between meetings in the easing cycle may occur. Our 2024 yearend policy rate forecast stands at 9.00%.