Itaú BBA - MEXICO – Gradual rate cuts in emergency meetings

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MEXICO – Gradual rate cuts in emergency meetings

Abril 21, 2020

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In an extraordinary meeting, Banco de Mexico (Banxico) cut its policy rate unanimously by 50-bp (bringing it to 6.00%). Banxico cut its policy rate despite the recent rating downgrades to PEMEX (rated now by two out of three rating agencies as junk), a risk noted in the past monetary statements. We also note Javier Guzman, a hawkish Board member which had a dissident vote in the last monetary decision (voted for 25-bp cut, while the rest of the members voted for a 50-bp cut) was now on board for a more significant rate cut.

The balance of risks for economic activity are significantly biased to the downside. Banxico estimates preliminary an annual contraction in economic activity of more than 5% during the first half of the year due to the outbreak.

While the Board is still cautious over the balance of risks for inflation as uncertainty has increased meaningfully, the Board expects inflation to converge to Banxico’s target. The widening of slack conditions and lower energy prices (in the short-term) should put downward pressure to inflation. However, the depreciation of the exchange rate (depending on the magnitude and persistence) could pressure inflation to the upside. Still, the Board expects inflation to converge to Banxico’s target (last statement the Board expected a slower convergence).

The Board also adopted additional liquidity measures (which including the previously measures announced, amounts to 3.3% of GDP) to foster an orderly functioning of financial markets. Among the new measures announced are extending the securities eligible for ordinary liquidity facility, foreign exchange hedging program and USD credit operations; open a facility liquidity to repurchase government securities of longer terms,  temporary swap security window (exchange of debt instruments in exchange for government securities);  corporate securities repurchase facility through financial institutions; provision of resources to banking institutions to channel credit to SME’s;  collateralized financing facility for commercial banks with corporate loans, to finance micro, small- and medium-size enterprises; swap of government securities (10 years and longer for 3 years), implementation of the currency hedging program also when Mexican markets are closed.

We expect Banxico to continue easing its monetary policy stance, reaching a rate of 4.50% before the end of 2020. In all, the Board seems more convinced for the need of lower rates amid the widening of slack conditions and lower inflation, reducing upside risks to our policy rate forecast. At the same time, the decision to cut the policy rate by 50-bps indicate Banxico is not willing to adopt a significantly looser policy stance than the one we are expecting. 

João Pedro Resende
Julio Ruiz


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