Itaú BBA - MEXICO – Monetary policy minutes: a gradual easing cycle

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MEXICO – Monetary policy minutes: a gradual easing cycle

Novembro 28, 2019

Strong divisions within the board remain.

The central bank of Mexico (Banxico) published the minutes of November’s meeting, held two weeks ago, when three out of five members voted to cut the policy rate 25-bp (to reach a rate of 7.50%). As widely expected, the minutes revealed deputy governors Jonathan Heath and Gerardo Esquivel were the two members voting for a larger rate cut (50-bp), for the second consecutive time, considering lower headline inflation, weak economic activity and easing of monetary policy conditions worldwide. Deputy Jonathan Heath clarified that he agrees with Banxico having a tight monetary policy stance to guarantee core inflation is consistent with the inflation target, but  the level of tightness of the current monetary policy stance is excessive (that is, the real policy rate is far above levels consistent with a neutral monetary policy).  

The minutes showed a still-divided board over the balance of risks for inflation. For instance, regarding upside risks for inflation, not all board members mentioned the possibility of core inflation continuing to show persistence (some members added this could occur despite the slack in the economy) and wage increases above productivity (with some members mentioning the uncertainty around the new adjustment in the minimum wage next year). In this context, most board members agreed that uncertainty still persist regarding the risks that could deviate inflation from its expected path, while one board member considered the balance of risks for inflation remains neutral.

Banxico is in an easing cycle, but gradual. As the corresponding statement already suggested when removing the sentence that the new policy rate level is consistent with the convergence of headline inflation to the central bank’s target, the minutes leave more clear Banxico is in an easing cycle despite the guidance of stable rates in the U.S.. However, most of the board members emphasized the adjustment of the monetary policy rate should be gradual, given the uncertain environment for inflation. One of these members considered the following factors to justify a gradual adjustment of the monetary policy stance:  (1) an external environment of lower inflationary pressures and interest rates; (2) headline inflation around its target and persistent core inflation; (3) widening of slack conditions; (4) the need for aligning short-term interest rates (in line with the yield curve and the risk premia). 

Weak economic activity and low headline inflation gives room for the central bank to continue easing monetary policy. The minutes show the three board members that voted for a 25 bp cut in the monetary policy decision (the rest of board members voted for a 50 bp cut) are still concerned about core inflation persistence (also reflected in the core inflation forecast upward revisions in Banxico’s most recent inflation report), advocating for a gradual monetary policy easing. In this context, we now expect Banxico to cut the policy rate by 25-bp in the next December meeting. However, given weak economic growth and its likely effect on core inflation ahead, we still think an acceleration of the easing cycle at some point is possible, especially if some key risks surrounding the inflation outlook (such as USMCA approval in the U.S. congress) dissipate.   
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João Pedro Resende
Julio Ruiz



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