Itaú BBA - MEXICO – Banxico minutes: still no forward guidance amid an uncertain outlook

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MEXICO – Banxico minutes: still no forward guidance amid an uncertain outlook

Maio 28, 2020

Most members pointed out the importance of acting with prudence

The central bank of Mexico (Banxico) published the minutes of May 14 meeting, in which the Board unanimously decided to cut the policy rate by 50-bp (to reach a rate of 5.50%). 

Most members stated the outlook for monetary policy continues to be uncertain, while two members called for giving forward guidance. On the one hand, two Board members pointed out that it is necessary to act with prudence given the high degree of uncertainty. In contrast, one Board member called for sending a signal that monetary policy easing will continue depending on how the crisis evolves and of the possible deterioration of economic and financial conditions. In the same line, other member was of the opinion that under the current juncture, the most prudent monetary policy would be to significantly lower the policy rate so that the real policy rate lays below the neutral rate as soon as possible, without discarding the possibility of reaching zero or negative levels. 

The majority of the Board is worried about capital outflows in the event of an aggressive monetary policy response. Most members pointed out that some emerging economies that have lowered their policy rates rapidly have suffered a depreciation of their currencies, despite having intervened in the foreign exchange market. One member added that in some of these countries long-term interest rates also increased, while another member added that following a gradual strategy is essential given an uncertain environment.

Discrepancies within the Board over the balance of risks for inflation remain. Two Board members considered the balance of risk for inflation as uncertain given several forces in opposite direction affecting inflation. On the other hand, one member considered that the widening of the negative output gap ought to have a greater impact than the exchange rate depreciation effect on prices. Other member considered downward pressure on inflation are prevailing upward pressures (considering April’s inflation data).

We expect the policy rate to reach 4.00% by the end of 2020. Difference within the Board over the balance of risks for inflation and easing pace suggest that cuts larger than 50-bp are unlikely and opens the possibility of decelerating the easing cycle or even pausing it (considering also the recent increase in inflation projections for 2020 in the most refent inflation report). Still, given the significantly widening of the negative output gap and the recent ease in financial conditions, our base scenario is for Banxico continuing to cut its policy rate in 50-bp cuts (until it reaches 4.00%).

Julio Ruiz

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