Itaú BBA - MEXICO – Monetary policy decision: reinforcing gradualism

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MEXICO – Monetary policy decision: reinforcing gradualism

Dezembro 19, 2019

Only one dissident board member voted for a 50-bp cut

Banco de Mexico (Banxico) cut the policy rate by 25 basis points, bringing it to 7.25%, in line with our forecast and market expectations. While once again the decision wasn’t unanimous, only one board member voted to cut the policy rate by 50-bp (compared to November’s monetary policy meeting when deputy governors Heath and Esquivel both voted for a 50-bp cut). In our view, the deputy governor who now joined the majority of board members, voting for a 25-bp cut, was Jonathan Heath, as in the minutes of the latest monetary policy decision he had already expressed agreement with Banxico keeping a tight monetary policy stance (which is consistent with more gradual rate cuts as the policy rate approaches the neutral range). Overall, the statement retained a cautious tone, mentioning the risks linked to the recent minimum wage hike, while also acknowledging the benefits for the currency of the likely approval of the USMCA. 

The statement maintained a balance of risks for growth tilted to the downside. The Board noted that weakness in economic activity is expected to persist, which implies a widening of the output gap. Still, the board views the recent data as consistent with the scenario outlined in the latest inflation report.  

The Board mentioned that inflation could hover “moderately” above the path forecasted in the latest inflation report if the increase in minimum wage translates into cost-push inflationary pressures. 

Banxico listed the same upside and downside risks for inflation compared to November’s statement, with few adjustments. The statement was more explicit on the effect  of minimum wage hike on prices and formal employment, when debating risks linked to wage inflation. Moreover, the Board toned down the upside inflation risk associated to a depreciation of the exchange rate, given a more benign external environment and progress in ratifying the USMCA. In this context, the statement mentions uncertainty still persists regarding the risks that could make inflation deviate from the described path (in-line with the statement of the previous decision). 

We expect Banxico to gradually cut its policy rate in 2020, reaching a level of 6.00%. Weakness in economic activity, low headline inflation and the stronger currency open room for Baxico to continue easing monetary policy. However, the concern of the majority of board members with the persistence of core inflation, the potential effect of the recent minimum wage on prices and the fact that one of the Board members who voted in the November’s monetary policy meeting for a 50-bp cut is now voting for a 25-bp cut, reduce the odds of accelerating the easing pace for now.


 

João Pedro Bumachar 
Julio Ruiz



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