Mexico: Banxico cuts key rate to near four-year low in June
June 25, 2020
At its 25 June meeting, the Governing Board of the Bank of Mexico (Banxico) decided to lower the target for the overnight interbank interest rate by 50 basis points to 5.00%, marking the ninth consecutive cut and the lowest since November 2016. The decision was unanimous and came in line with market expectations.
Banxico eased its stance once again after assessing that the economic damage from the Covid-19 pandemic will be deeper than initially thought. The economy contracted sharply in the first quarter, with available data suggesting April will be even worse. And although some sectors began reopening in May and June, boding well for recovery, the blow has been stark and considerable uncertainty persists, leading the regulator to acknowledge that risks to growth are “significantly tilted to the downside”. On the inflation front, despite rising from 2.1% in April to 3.2% in the first half of June, Banxico deemed that short-term inflation expectations are still close to its 3.0% target. As in the previous meeting, the Bank saw risks to the inflation trajectory as highly uncertain: A weaker peso and supply chain disruptions may stoke price pressures while a wider output gap and reduced pressure coming from abroad may clamp them down.
In terms of forward guidance, the statement struck a slightly dovish tone by stressing that inflation determinants have shifted the inflation path somewhat lower than what was announced in its last quarterly inflation report. This, coupled with depressed activity prospects, which will drive inflation lower, may open up the door for additional cuts ahead. Banxico also reiterated that it will take the necessary actions according to available information and in consideration of the pandemic’s impact on economic activity and the evolution of financial conditions so that inflation converges to target.
The next monetary policy meeting is scheduled for 13 August.
Author: Javier Colato, Economist