Itaú BBA - MEXICO – Monetary policy minutes: not committing with further rate cuts

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MEXICO – Monetary policy minutes: not committing with further rate cuts

Fevereiro 27, 2020

Most members are data dependent for future monetary policy decisions

The central bank of Mexico (Banxico) published the minutes of February’s meeting, when the Board voted unanimously to cut the policy rate by 25-bp (to reach 7.00%). The general tone of the minutes is cautious. Although two board members still see the monetary policy stance at the time of the meeting as still “too tight”, two board members see the balance of risks for inflation as tilted to the upside and most of them mentioned wage inflation as a factor behind core inflation stickiness, in a context of strong minimum wage hikes that are likely to keep wage inflation high. Furthermore, despite a widening output gap the majority of board members downplayed the capacity of the central bank to boost the economy through lower interest rates.        

Most members are data dependent for future monetary policy decisions. Like in the monetary policy statement,  the corresponding minutes didn’t provide much forward guidance, as most of the board members called for future policy rate adjustments based on the evolution of the balance of risks for inflation and the economic juncture. One member called for a prudent and gradual approach given the uncertain environment, while other member pointed that future monetary policy decisions must rely on available information. However, two Board members think the monetary policy stance at the time of the meeting continues to be too restrictive. Likewise, one Board member (probably one of the same members that argued for a less restrictive stance) backed adjusting the monetary policy rate in a short period of time, arguing that based on available information, it is possible to envision an scenario in which the interest rate’s neutral zone is attained by the end of 2020 (upper bound of 3.4% in real terms).  

Divisions over the balance of risks for inflation remain, however members seem more cautious than before. Two board members pointed out that uncertainty continues in the balance of risk for inflation, while other two Board members think is tilted to the upside. In contrast, one board member noted that risks for inflation have decreased. In general, Banxico members opinions towards the balance of risks for inflation seems more conservative compared to the previous minutes, in which only one member noted the balance of risks for inflation was tilted to the upside, while most members considered it as uncertain. 

Most members downplayed the need for monetary policy response to boost economic growth. One member noted that while a restrictive monetary stance might drag consumption and investment, it is not the main factor behind the loss of dynamism (most members noted that uncertainty regarding public policies could continue affecting business confidence and investment). Another member mentioned that recent research suggest that given the share of informality in the economy and low credit penetration, the impact of monetary policy is limited. Moreover, most members noted that core inflation does not appear to have been too sensitive to slack conditions, partly due to wage evolution.

We expect the policy rate to end this year at 6.00% (currently at 7.00%), with the next rate cut of 25-bp in March’s policy meeting. The widening of slack conditions and the performance of the Mexican peso (assuming the recent depreciation is transitory) support gradual rate reductions. However, the cautious tone adopted by Banxico means that policy rate decisions will be contingent on the evolution of inflation data (while activity numbers will likely play a less important role). 


João Pedro Resende
Julio Ruiz



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