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Mexico Monetary Policy April 2020

Mexico: Banxico cuts key rate and unveils additional liquidity support measures in second emergency meeting in April

In yet another surprise meeting on 21 April, the Governing Board of the Bank of Mexico (Banxico) unanimously decided to chop the target for the overnight interbank interest rate by 50 basis points to 6.00%, marking the seventh consecutive cut on the heels of the unexpected 50-basis-points cut delivered in March. Banxico also unveiled up to MXN 750 billion (about USD 31 billion) in additional measures to support the financial system amid the Covid-19 crisis. Coupled with previously announced measures, the total package is set to amount to 3.3% of GDP.

The drastically deteriorated economic scenario due to the Covid-19 pandemic, which Banxico forecasts will cause the economy to contract 5.0% year-on-year in the first half of 2020, and the expected convergence of inflation to Banxico’s target over its policy horizon, notwithstanding heightened uncertainty over both the upside and downside risks, led the monetary authority to ease its stance. In a similar take in its previous meeting, Banxico stressed that a wider output gap and lower fuel prices could keep a lid on inflation, while currency weakness could stoke price pressures.

The additional measures announced were geared mainly to increase stability and reduce distortions in financial markets. Highlights included facilitating repurchase agreements on government and corporate debt; increasing funding to commercial and development banks to channel credit to SMEs and households; and offering currency hedges to market participants during Asia and Europe trading hours to reduce peso volatility.

In terms of forward guidance, the statement struck a dovish tone by highlighting the amplified risks to the economy as Covid-19 takes its toll and amid the recent credit rating downgrades of the sovereign and state oil company Pemex. Against this backdrop, Banxico stressed that it will take the necessary actions according to available information and policy will be adjusted accordingly so that inflation converges to target. As things stand, the Bank is widely expected to continue unwinding its stance.

The next monetary policy meeting is scheduled for 14 May.

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