Mexico: Banxico leaves policy rate unchanged in August
At its meeting on 10 August, the Governing Board of the Bank of Mexico (Banxico) left the overnight interbank interest rate target at 11.25%, following a similar hold in June.
The decision to hold followed 575 basis points of rate hikes since January 2022, and came against a backdrop of peso appreciation and declining headline and core inflation which rendered further tightening unnecessary. On the flipside, it was premature to begin cutting rates given that the economy has recently performed stronger than the Bank expected and that headline inflation, core inflation and long-term market inflation expectations are all still above the Central Bank’s 3.0% target.
Concerning forward guidance, the Bank repeated its intention to “maintain the reference rate at its current level for an extended period”. Most panelists see Banxico starting to loosen its monetary stance in Q4 2023, though some panelists see rates unchanged through year-end.
On the outlook, Goldman Sachs analysts said:
“The forward guidance did not change; [it] remained conservative and signaling on hold for long. We expect the MPC to hold the policy rate unchanged until late 4Q2023, possibly 1H2024.”
In contrast, Itau Unibanco analysts were more dovish:
“Banxico is unlikely to change the monetary policy stance in the September meeting, but as inflation eases more clearly towards 4Q23 they will start considering rate cuts. Our base case is a 25-bp rate cut in each of the last two meetings of the year (November and December), implying an end of year policy rate of 10.75%.”