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Mexico Monetary Policy November 2018

Mexico: Banxico hikes rates amid AMLO-related uncertainty

At its 15 November monetary policy meeting, Banxico’s five-member board voted to hike the target rate by 25 basis points to a near-decade high of 8.00%, in line with analysts’ expectations. The decision was split: A majority voted to raise rates, with one member opting for a 50-basis-point hike. Policymakers last raised rates in June in the run-up to the general election. Ahead of the decision, and two weeks before President-elect Andrés Manuel López Obrador (AMLO) takes office, longtime member Roberto del Cueto Legaspi announced his resignation from the board.

Downside risks for growth have materialized in the weeks since the policymakers last met, driven largely by policy uncertainty in light of AMLO’s incoming government. The peso plummeted in October on the president-elect’s announcement of the cancellation of the New Mexico City International Airport (NAIM), which was scrapped by referendum—a method favored by AMLO but one which has been criticized by analysts. Although economic activity appeared to improve in the third quarter, several financial metrics, including Fitch Ratings’ revised credit-rating outlook, point to marginally weaker growth prospects through year-end. Moreover, upside risks for inflation have taken greater shape amid the weaker peso, and non-core measures are expected to remain elevated on higher energy prices.

Banxico’s hawkish tone was clear from one board member’s vote to hike rates instead by 50 basis points, which hints that another rate hike could come at its year-end meeting on 20 December. Should the peso continue to react to AMLO’s policy prescriptions, upside risks to inflation will almost certainly mount and could push policymakers to raise rates again in the new year—an about-face to what analysts had penciled-in only months ago before AMLO’s controversial governing style had become apparent to financial markets. On the flipside, the expected signing of a revamped North American Free Trade Agreement (NAFTA) at the end of the month should soothe markets somewhat.

Commenting on November’s hike, analysts at Nomura noted:

“The statement says risks to growth have deteriorated, but the focus in the communique, to us, is in the bigger picture policy-related risks. In this environment, we expect Banxico to hike further, given our current view of additional MXN weakening from here. We now expect two additional hikes, taking rates to 8.50% in 2019 (from our previous view of 8.00%). For now, our base case for the December meeting is stability at 8.00%. Naturally, these views are importantly dependent on the exchange rate level.”

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