Itaú BBA - MEXICO – Monetary policy meeting anticipated: A 50-bp hawkish cut, but more easing is likely

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MEXICO – Monetary policy meeting anticipated: A 50-bp hawkish cut, but more easing is likely

Março 20, 2020

We expect a policy rate of 5.50% by the end of 2020.

Banco de Mexico (Banxico) cut its policy rate by 50-bp (bringing it to 6.50%) in a meeting that was moved forward (originally scheduled for March 26th). The decision wasn’t unanimous as one of the board members voted for a 25-bp cut. Although the anticipation of the decision came as a surprise, the magnitude of the rate reduction was in-line with our expectation.

The statement reflects a cautious tone, as it mentions the uncertainty as to the balance of risks for inflation has increased. While the widening of slack conditions together with a decline in energy prices may put downward pressure to inflation, it could be offset by upward pressures from the depreciation of the currency. In this sense, Banxico expects inflation to continue with a downward trend, but at a slower pace than expected.

On the other hand, downside risks to economic activity have increased.  The Board expects an even greater than anticipated widening of output gap due to the negative effects on the economy from the coronavirus outbreak, in a context of further weakening of global economic activity.

Despite the cautious tone, we expect Banxico to continue easing its monetary policy stance, reaching a rate of 5.50% before the end of 2020. The widening of output gap and a substantial wider relative monetary policy position supports the central bank continue cutting the policy rate. However, the sharp depreciation of the currency, the impact of lower oil prices on Pemex balance sheet and on-going uncertainties over domestic policy direction stand in the way of more aggressive rate cuts.

João Resende

Julio Ruiz

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