Mexico: Banxico axes rate for fifth consecutive time in February to revive activity
February 13, 2020
At its first meeting of the year on 13 February, the Governing Board of the Bank of Mexico (Banxico) unanimously decided to slash the target for the overnight interbank interest rate by 25 basis points to 7.00%, marking the fifth consecutive cut and coming in line with market expectations.
As in December’s meeting, efforts to revive growth and broadly contained inflationary pressures underpinned the Board’s decision. Inflation climbed to 3.2% in January from an over three-year low of 2.8% in December, landing slightly above Banxico’s 3.0% target. However, core inflation has proved sticky and hovered at around 3.7% recently, stoked in part by excise taxes. Meanwhile, economic activity has remained depressed, with the latest GDP data showing that output contracted yet again in the final quarter of 2019—leading to the first full-year economic slump since the 2009 crisis.
In terms of forward guidance, the statement struck a broadly neutral tone, alluding to a continuation of the current easing cycle, though at a gradual pace. The main downside risk to the outlook remained weak growth and the Bank indicated it will lower its forecasts in the next Inflation Report. In addition, although the Bank hinted it will revise its inflation and core inflation forecasts modestly higher, the balance of risks remains balanced. Stickiness of core inflation; wage increases that could affect price dynamics; a deterioration in public finances; and higher-than-expected price growth for energy and farm products could stoke inflation, while an appreciation of the peso, lower global energy prices amid the coronavirus outbreak, and wider-than-anticipated slack could weigh on inflation. As such, as in December’s meeting, the Bank stressed that it will maintain a prudent stance going forward and policy will be adjusted accordingly so that inflation converges to target.
The next monetary policy meeting is scheduled for 26 March.
Author: Javier Colato, Economist