Itaú BBA - MEXICO – Banxico minutes: easing cycle with prudence

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MEXICO – Banxico minutes: easing cycle with prudence

Maio 5, 2020

Board members seem to agree on the need for lower rates

The central bank of Mexico (Banxico) published the minutes of April 21st extraordinary meeting, in which the Board unanimously decided to cut the policy rate by 50-bp (to reach a rate of 6.00%). All members acknowledged the necessity to make a monetary policy decision out of the program to respond promptly to the fast change in the domestic and global environment in the week before the policy decision. 

Still most members pointed out the importance of acting with prudence, while one board member called for a bolder response. The materialization of some risks associated to PEMEX and public finances; inflation (jeopardizing also the credibility of Banxico’s commitment to inflation) and volatility in financial markets are among the factors mentioned by the board members that justify Banxico acting with caution. On the contrary, one board member mentioned that the most prudent monetary policy is to lower the policy rate substantially so that the real policy rate is below its neutral level (1.8% lower bound) as soon as possible, without discarding the possibility of moving towards a real rate close to zero or even negative. 

Discrepancies within the Board over the balance of risks for inflation remain. While most board members noted that uncertainty over the balance of risks for inflation has increased significantly, one board member considered it is clearly biased to the downside and another member specified it is biased to the downside in the short term. Moreover, two members (likely the same members that saw the balance of risks titled to the downside) argued that upward pressures to inflation from the currency depreciation will have a limited impact.

Differences also remain over the effectiveness of monetary policy to support the economic recovery. One member argued that the credit channel is ineffective to reactivate the economy and another member added that monetary policy can only contribute to long-term growth by generating the conditions for macroeconomic stability. In contrast, one member considered wrong to believe that low interest rates cannot contribute to the economic recovery as SME’s would be highly favored by a significant reduction in the interest rate.

Given well-behaved inflation and the sharp deterioration of activity, we see downside risks to our forecast of a policy rate of 4.50% by the end of year 2020, while another 50-bp rate cut will likely come in May.  Board members seem to agree on the need for lower rates, but most of them still have a cautious tone over the easing pace (hinting that cuts larger than 50-bps are unlikely, even though more easing in out-of-schedule meetings can’t be ruled out).

João Pedro Resende
​​​​​​​Julio Ruiz

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