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Mexico Monetary Policy September 2023

Mexico: Banxico leaves policy rate unchanged in September

At its meeting on 28 September, the Governing Board of the Bank of Mexico (Banxico) left the overnight interbank interest rate target at 11.25%, following a similar hold in August.

The decision to hold came against a backdrop of declining headline and core inflation in recent months 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”. Several panelists see Banxico starting to loosen its monetary stance in Q4 2023, though many panelists see rates unchanged through year-end. All panelists see rate cuts next year. Risks certainly seem tilted towards rates staying higher for longer, particularly in light of the Fed’s recent guidance that it would keep U.S. rates high well into 2024.

On the outlook, Goldman Sachs analysts said:

“We are revising our interest path in Mexico. We now anticipate the first rate cut (-25bp) in March 2024 (vs Dec-23 before) and expect the policy rate to reach 9.75% by end 2024 (vs 9.00% before). The revision reflects a combination of domestic and external factors, namely, on the domestic side, resilient above-trend growth and a tight labor market (the economy is running hot with now a positive output gap), lingering wage/cost pressures, and upwards risk to non-core food and fuel prices, and on the external side, the recent hawkish guidance by the Fed.”

In contrast, Itaú Unibanco analysts were slightly move dovish:

“We now think that the easing cycle will be delayed slightly, given that core goods inflation is still high and services inflation is only slowly edging down. Our year-end inflation forecast stands at 4.5%. We expect Banxico to begin an easing cycle in December 2023 with a 25-bp rate cut (we previously expected the first cut to come in November).”

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