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Mexico Monetary Policy November 2020

Mexico: Banxico pauses easing cycle in November

At its 12 November meeting, the Governing Board of the Bank of Mexico (Banxico) decided keep the target for the overnight interbank interest rate unchanged at 4.25%, marking the first hold after delivering a total of 400 basis points in cuts over eleven straight meetings. The decision was not unanimous as one of the five-member board voted for a 25-basis-point cut. It also surprised market analysts, who had expected the Bank to ease its stance once again.

Banxico’s decision to pause its easing cycle was driven by the need to assess the recent uptick in inflationary pressures, thus providing it with room to determine future policy action. Inflation inched up to a 17-month high of 4.1% in October (September: 4.0%), landing above Banxico’s tolerance band of 3.0% plus or minus 1.0 percentage point. The Bank deemed that the recent behavior seen in inflation and core inflation, coupled with the factors affecting them, implied a slight increase in their expected trajectories, particularly in the near term. Risks that could impact this path remained similar to those laid out in the previous September meeting, with a larger-than-anticipated output gap and social distancing measures adding downward pressure, while currency depreciation and persistent elevated core inflation working in the opposite direction. On the economic activity front, despite a strong quarterly GDP rebound in Q3, output remains well below pre-pandemic levels and ample slack is still expected ahead.

In terms of forward guidance, Banxico struck a cautious tone in its statement by stressing its need to confirm that the inflation path converges towards target. That said, rendering the latest move as a “pause” still leaves the door open for potential further easing ahead.

Commenting on Banxico’s possible policy actions going forward, economists at Casa de Bolsa Finamex noted:

“Although this entails that Banxico left the door opened for further monetary policy accommodation, we expect this to be a prolonged pause, as the Bank conditioned future movements not only to the evolution of its inflation projections and of inflation expectations, as in previous decisions, but also to the evolution of observed inflation, which we do not see going significantly down until mid-2021. […] For the time being we expect the reference rate to remain at its current 4.25% level until at least the first half of 2021, after which a space for further rate reductions that take the real rate closer to zero percent may open.”

The next monetary policy meeting is scheduled for 17 December.

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