Mexico: Banxico cuts rate in February after two previous holds
February 11, 2021
At its first meeting of the year on 11 February, the Governing Board of the Bank of Mexico (Banxico) unanimously decided to chop the target for the overnight interbank interest rate by 25 basis points to 4.00%, after it stood pat in the two previous meetings. The decision was largely expected by market analysts.
Banxico’s decision to loosen its stance was driven by the uncertainty surrounding its outlook for inflation and economic activity, with risks tilted to the downside. Although inflation edged up to 3.5% in January (December 2020: 3.2%) and year-end expectations have risen somewhat, those for the medium and long term have remained stable at slightly above the Bank’s 3.0% target. Moreover, the apex bank expects a further buildup of price pressures in Q2 but sees them softening thereafter, with the balance of risks in either direction remaining uncertain. Similarly, the Bank highlighted the uncertain backdrop and downside risks to activity ahead, with ample slack expected over its policy horizon.
In terms of forward guidance, Banxico struck a largely dovish tone in its statement, suggested by the unanimous decision to lower rates and no mention over whether there is limited space to deliver more easing. It highlighted instead that its conduct of policy ahead will depend on the evolution of factors that affect inflation, its foreseen trajectory and its expectations.
The next monetary policy meeting is scheduled for 25 March.
Author: Javier Colato, Economist