The central bank of Mexico (Banxico) released the minutes of July’s monetary policy meeting, in which board members unanimously voted to keep the policy rate unchanged at 11.25%, as expected. Overall, the minutes expressed the same cautious tone on the disinflationary process previously included in the meeting’s press release, suggesting rate cuts in the short term are unlikely.
More evidence on the disinflation path is needed before considering rate cuts. One member noted that the inflation outlook remains “complicated”, noting that the policy rate should remain at its current level for a period that ensures inflation declines in a sustained manner, moderating the upside risks to inflation. Another member noted that subsequent decisions will be data dependent, particularly with an eye on headline and core inflation consolidating their downward trend, as expected. A third member mentioned that the term “[maintain the reference rate for an] extended period” in the forward guidance should remain undefined until there is greater certainty on the improvement of the inflationary outlook, also warning it was too early to anticipate rate cuts by the end of 2023, as implied by market pricing. A fourth member warned of the still complex inflation scenario, noting that, at this moment, changes in the policy stance would be premature.
One member claims additional rate hikes from the Federal Reserve are not relevant. The member stated that the relative monetary policy stance allows for some room for maneuver to focus exclusively on the inflationary outlook, even if the US Federal Reserve were to raise its reference rate on several occasions.
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). We believe that as inflation eases more clearly towards the end of the year, Banxico will start an easing cycle in 4Q23