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Mexico Monetary Policy March 2019

Mexico: Banxico holds rates in March

At its 28 March monetary policy meeting, Banxico’s governing board unanimously voted to leave the target for the overnight interbank interest rate at 8.25%, matching market analysts’ expectations. The target rate has been on hold at the decade high following two consecutive hikes in November and December amid financial volatility.

The board’s decision came amid some signs of improvements in price pressures in Mexico. After over two years of persistently above-target inflation, the metric dropped into Banxico’s target range of 3.0% plus or minus 1.0 percentage point in February. In addition, the shift in the U.S. Federal Reserve’s tightening tone bodes well for the peso and has alleviated some upward inflation risks. That said, still-high core inflation measures and inflation expectations justify the tight monetary stance for now.

Looking ahead, the Bank’s tone was somewhat less hawkish than the previous communiqué, although remained cautious nonetheless. While the Bank acknowledged that recently downside risk factors to the price outlook have increased, it also emphasized that upside facts could still put pressure on inflation “in greater magnitude”. Overall, the Bank stated that the balance of inflation risks is titled to the upside side, largely due to policy uncertainty. Regarding the economy, the Bank regonized that growth in the Mexican economy has been low and stated that “the balance of risks for growth remains biased 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. Analysts at Nomura, for example, explained:

“We continue to believe that Banxico’s next rate move will be a cut. Additionally, the risks to our current call of stability in 2019 remain tilted towards an earlier cut in the base rate, and we do not believe Banxico has closed any doors for this year. However, [the] communiqué still suggests the board remains fairly concerned with the current level of inflation (including core and expectations) and the risks related to overall government policymaking, which remains quite uncertain.”

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