Itaú BBA - MEXICO – Monetary Policy Decision: Board unanimously vote for another 25-bp rate cut

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MEXICO – Monetary Policy Decision: Board unanimously vote for another 25-bp rate cut

Fevereiro 13, 2020

Deputy Governor Esquivel is no longer backing a 50-bp move.

As expected Mexico’s central bank reduced its policy rate by 25-bps, bringing it to 7%. However, in contrast with the past few policy meetings the decision was unanimous, as no board member voted for a 50-bp cut. This is consistent with the view expressed by Deputy Governor Esquivel – who had been backing a 50-bp cut – in the minutes of the previous decision that the window for a larger cut was narrowing (likely due to the expected year-over-year increase of headline inflation in January associated to tax hikes and an unfavorable comparison base). On the other hand, the two board members who have been more cautious kept voting for a 25-bp cut.  

Despite a new statement format, the tone of the document announcing the decision was broadly unchanged. The board indicated that growth for 2020 will likely be revised down (with a balance of risk tilted to the downside), while the path for both headline and core inflation will be “moderately higher” than estimated in the previous inflation report (something that had already been indicated in the previous meeting due to the minimum wage hike). As in the previous decision, the board continues to say that the balance of risks for the inflation forecasts are uncertain. In fact, the upside and downside list of risks suffered little changes. While the coronavirus epidemic was added as a downside risk, the board associated the disease to the effect it could have on global energy prices.

In all, the board continues with a cautious tone, avoiding providing guidance on future policy moves amid above-target core inflation and risks for the inflation outlook. We continue to expect the policy rate to end this year at 6.0%, as a negative output gap and a stronger Mexican peso curb inflationary pressures. However, given the cautious tone of authorities we do not rule out that the central bank opts to intercalate the cycle with pauses, despite economic weakness and a still-high monetary policy rate.     

João Pedro Resende
Julio Ruiz


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