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Mexico Monetary Policy September 2020

Mexico: Banxico cuts rate again in September; hints at easing cycle nearing end

At its 24 September meeting, the Governing Board of the Bank of Mexico (Banxico) decided to trim the target for the overnight interbank interest rate by 25 basis points to 4.25%, marking the eleventh consecutive cut and the lowest rate since August 2016. The decision was unanimous and came broadly in line with market expectations.

Expectations of ample economic slack ahead and a stable inflationary outlook over its 12–24-month policy horizon underpinned Banxico’s decision to ease its stance once again. Economic activity collapsed in Q2 on the Covid-19 fallout, with most of the damage felt in April and May. And although it began to recover in June and July, elevated uncertainty and downside risks persist. On the price front, Banxico noted that while the pickup in inflation to 4.0% in August (July: 3.6%) and 4.1% in the first half of September has raised its year-end expectations for inflation, it assessed that both headline and core inflation will converge around its 3.0% target in the medium and long term. As in the previous meeting, however, it stressed that risks to that inflation trajectory remain uncertain: A greater-than-anticipated output gap, reduced global inflationary pressures and less demand for services due to social distancing measures could weigh on price growth, while a weaker currency, persistent core inflation and higher costs due to containment measures could stoke it up.

In terms of forward guidance, the statement struck a slightly dovish tone while also hinting that the easing cycle may be nearing its end. Notably, considering the Bank’s explicit mention of “limited space” given its assessment of the risks to inflation, economic activity and financial markets, the window for further cuts ahead may be narrowing.

Commenting on the near-term outlook for Banxico’s actions, economists at Casa de Bolsa Finamex noted:

“All in all, we believe this was a neutral statement, one that did not put an effort to signal that the window for further rate adjustments was closed. Indeed, Banco de México acknowledged that its room for maneuver is limited. However, rather than thinking of this as a hawk statement, we interpret it as a natural continuation of its rhetoric towards putting an end to the easing cycle. Accordingly, we continue expecting an additional and final 25 bps rate cut in November’s decision.”

The next monetary policy meeting is scheduled for 11 November.

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