The central bank of Mexico (Banxico) released the minutes of August’s monetary policy meeting, in which board members unanimously maintained the policy rate unchanged at 11.25%, as expected. In our view, the minutes kept the same cautious tone on the disinflationary process as the corresponding statement, suggesting rate cuts are unlikely soon.
Most board members noted increasing risks to inflation from internal factors. One board member noted two risks factors that call for caution and argue against rushing into easing: (1) reduced potential GDP growth due to lower accumulated investment and the decline in productivity, which could generate demand side pressures and (2) PEMEX’s financial situation and its fiscal implications, which could disrupt financial markets, and the exchange rate. Another member noted increasing domestic inflationary pressures while placing less weigh to international factors. A third member argued that the greater resilience of the economy may suggest a more gradual monetary transmission channel to domestic demand, which contributes to a slower decline in the core component.
The minutes suggest rate cuts are unlikely anytime soon. One Board member warned that several analysts are expecting rate cuts before the end of 2023, but noted it is still premature to consider a possible cut, even in the case of fine-tuning to avoid an overly restrictive monetary policy stance. Another member considered that the policy rate must remain at its current level for an extended period of time amid a still complex and uncertain inflation outlook.
Most board members downplayed the influence from other central banks that already started their easing cycle. A board member pointed out that central banks decisions respond to particular macroeconomic conditions prevailing in each country, resulting in heterogeneity in the easing cycles. Another member argued that the beginning of monetary easing in some emerging market economies respond to different contexts, and cannot be taken as reference with Mexico. A third member indicated that Banxico’s more gradual tightening cycle than other emerging economies, is resulting also in a differentiated easing cycle.
A non-generalized slowdown in core inflation increases the odds of the central bank delaying the start of rate cuts from our base call of a 25-bp cut in November (reaching an end of year policy rate of 10.75%). While core goods annual inflation continues falling (although still at a high level), persistence in core services inflation, which could be associated to internal factors as noted by some board members, remains.