Itaú BBA - MEXICO – On going 50-bp easing cycle

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MEXICO – On going 50-bp easing cycle

Maio 14, 2020

Balance of risk for inflation remains uncertain

Banco de Mexico (Banxico) cut its policy rate unanimously by 50-bp (bringing it to 5.50%), noting a sharp deterioration in economic outlook. Even though the minutes of the previous decision suggested at least one board member was in favor of a looser policy stance, there was no dissenting vote. As has been the norm, the central bank did not provide a clear forward guidance, once again highlighting the uncertainty surrounding the inflation outlook.  

The balance of risk for inflation remains uncertain.  While the statement continues to mention a persistent depreciation of the currency as an upside risk for inflation, the statement now mentions upward pressure to inflation from possible disruption to chains of production and distribution of certain goods. On the other hand, the statement gave more emphasis to the negative output gap as a downside risk for inflation and mentioned low energy prices once again.

We expect the policy rate to reach 4.00% at the end of 2020. The significant widening of the negative output gap will likely keep headline inflation low and gradually brings core inflation to the target. However, the still cautious tone of the Board over risks surrounding inflation means that rate cuts larger than 50-bps are unlikely, although the central bank is open to make use of out-of-schedule policy meetings if necessary. 

Joao Pedro Resende
Julio Ruiz

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