Mexico Monetary Policy August 2017

Mexico

Mexico: Banxico maintains interest rate in August, halting the cycle of rate hikes

August 10, 2017

The Central Bank of Mexico (Banxico) unanimously voted to keep the policy rate unchanged at 7.00% at its 10 August monetary policy meeting, ending the 400-basis-point tightening cycle that it carried out over the course of last year. Officials at the Bank stressed that the current policy stance was consistent with inflation converging to the Bank’s target over the medium term, noting that inflation expectations remain well anchored and that the balance of risks to inflation continues to be neutral.

Banxico reacted positively to stronger-than-expected economic growth through the first half of the year, mentioning that the balance of risks for growth had improved since the previous decision and was now back to neutral. The Bank’s more upbeat take on the economy also stemmed from warmer relations between Mexico and the U.S., which seem to be improving now that tensions over immigration and trade agreements have simmered down.

On the price side, the Bank shrugged off concerns related to the latest jump in inflation, attributing it largely to temporary supply shocks related to fresh fruit and vegetable prices. Officials noted that, excluding certain food products, inflation is already decelerating. Banxico kept its neutral balance of risks to inflation, as potential knock-on effects linked to simultaneous transitory shocks and persistently-high agricultural prices continue to be offset by the strengthening of the peso and lower energy costs. All in all, the Bank expects inflation to continue a downward trend and reach the target rate of 3.0% by the end of 2018. Core inflation, however, will continue to be problematic, and the Bank expects it to stay above the upper range of the target rate through the medium term.

The Bank provided little forward guidance in this month’s meeting apart from the standard monitoring of inflation and exchange rates. Overall, the Central Bank struck a neutral tone. The Bank said that it would continue to monitor the peso’s performance, the potential second-order effects from transitory price shocks, the expected deceleration in economic growth and the Federal Reserve’s own hiking cycle, and that it would maintain a prudent monetary stance in response.

The debate seems to have shifted to when the Central Bank will start easing monetary conditions. On average, the view of the panel of analysts surveyed by FocusEconomics is that the overnight interest rate target will end 2017 at 7.03%, which suggests a slim possibility of yet another interest rate hike. For 2018, analysts expect the interest rate to drop, on average, to 6.65% as dwindling inflationary pressures warrant a softer policy stance.


Author:, Economist

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Mexico Monetary Policy August 2017 0

Note: Banxico target rate (Tasa objetivo de fondeo bancario) in %.
Source: Mexico Central Bank (Banxico).


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