Itaú BBA - MEXICO – Monetary policy decision: On-hold, as expected; without a significant change in tone

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MEXICO – Monetary policy decision: On-hold, as expected; without a significant change in tone

Março 28, 2019

The balance of risks for inflation continues to be tilted to the upside.

Banco de Mexico (Banxico) board members voted unanimously to leave the policy rate unchanged at 8.25%, in line with our expectations and market analysts. The tone of the statement didn’t change significantly compared to the last monetary policy decision statement (February 7). The Board still mentions that they will take the necessary actions so that the reference rate is kept at a level consistent with the convergence of headline inflation to Banxico’s target. 

The balance of risks for inflation continues to be tilted to the upside. Although downside risks to inflation have intensified, there are still other factors that might put upward pressure on inflation in greater magnitude and deviate it from its expected path. On the downside risks to inflation, the statement mentions lower price increases in some of the goods included in the non-core subindex or greater than expected slackness conditions. However, the Board is still worried about persistence in core inflation, in addition of internal and external factors pressuring the exchange rate (and in turn inflation), the effect of the minimum wage hike in overall wage revisions (if they exceed productivity gains) and a deterioration of public finances.

Although Banxico acknowledged favorable international conditions prevailed, current environment continues to pose risks, while Mexico’s economy continues to show weakness. Among the risks mentioned are those related to the credit rating of Pemex and to Mexico’s sovereign debt. Regarding economic activity, Mexico’s economy continued registering low growth as a result of the slowdown of the world economy, some weakness in domestic demand, and transitory factors that might have affected growth during the first quarter of the year.

We expect Banxico to deliver two 25-bp rate cuts in the last quarter of 2019. Rate cuts in the short term are not expected given that Banxico’s inflation balance of risks continues to be tilted to the upside (although they recognized downside risks to inflation have intensified). Looking forward, we believe that with inflation falling within the target range, growth below potential and a looser monetary policy stance of the Fed, the central bank will have room to start a gradual normalization cycle, as long as uncertainty abates (and, consequently, risks for inflation fall).

 

João Pedro Bumachar
Julio Ruiz



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