Mexico Monetary Policy February 2019

Mexico

Mexico: Banxico holds rates in February

February 7, 2019

At its 7 February monetary policy meeting, Banxico’s governing board unanimously voted to leave the target for the overnight interbank interest rate at its decade-high 8.25%. The decision match market analysts’ expectations and followed two consecutive hikes in November and December amid financial volatility. Notably, February’s meeting was the first decision made with President Andrés Manuel López Obrador (AMLO)’s two appointed board members on the voting committee.

The board’s decision came on the back of moderating inflationary pressures and more stable exchange-rate dynamics at the start of 2019. Inflation dropped to 4.4% in January and the shift in the U.S. Federal Reserve’s tone, suggesting a slower pace of monetary tightening, has improved sentiment for emerging-market currencies. That said, Banxico emphasized that risks to the inflation outlook remain skewed to the upside, justifying the need for a tight stance. Particularly, rising global protectionism and the deterioration of public funds threaten the peso, which would likely stoke inflation in turn.

Looking ahead, the Bank’s tone was somewhat less hawkish than the previous communiqué, although devoid of strong forward guidance. The Bank stated that the economy slowed “significantly” in the fourth quarter and that growth risks are skewed to the downside. Most of our analysts see the Bank having reached the end of its tightening cycle, although analysts are divided on whether a rate cut will materialize by year-end.

On average, FocusEconomics analysts see the target rate falling to 8.10% by year-end and dropping further to 7.26 by end-2020.


Author: Angela Bouzanis, Senior Economist

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