Mexico: Banxico cuts rate for first time in over five years in August
August 15, 2019
At its 15 August meeting, the Governing Board of the Bank of Mexico (Banxico) voted to lower the target for the overnight interbank interest rate by 25 basis points to 8.00%, marking the first rate cut since June 2014 and ending a tightening cycle which started in December 2015. Only one of the five Board members voted against the decision, who was in favor of maintaining the rate at 8.25% as had been expected by most market analysts.
The Board’s decision was underpinned by easing inflation, increasing slack in the economy and the recent behavior of yield curves at home and abroad. Price pressures have softened in recent months, with inflation ticking down to 3.8% in July (June: 3.9%) on softer energy inflation, thus remaining within Banxico’s target range of 3.0% plus or minus 1.0 percentage point. Core inflation has also hovered at around 3.8% as of late, while inflation expectations remain relatively stable. For its part, activity has languished so far in the year, with the economy growing just 0.1% quarter-on-quarter in Q2 and thus only narrowly avoiding falling into technical recession. These factors, combined with heightened concerns over a slowing global economy and the dovish turns by central banks around the world—most notably the Fed which cut rates in July for the first time since 2008—drove Banxico to loosen its stance.
In terms of forward guidance, the Bank struck a cautious tone in its communiqué. It noted that risks to the inflation outlook remain balanced, with upward risks stemming from peso weakness, the still-looming threat of U.S. tariffs and higher labor costs, while currency appreciation, lower energy prices and greater-than-expected slack could push pressures down. In addition, amid heightened global economic uncertainty and weak activity recently, the Bank stated that risks to its growth outlook remain tilted to the downside. All in all, the Board stressed that it will maintain a prudent policy stance ahead and will act accordingly if risks were to materialize, as laid out in the previous June meeting.
The next monetary policy meeting is scheduled for 26 September.
Author: Javier Colato, Economist