Mexico: Banxico proceeds with tenth consecutive rate cut in August
At its 13 August meeting, the Governing Board of the Bank of Mexico (Banxico) decided to lower the target for the overnight interbank interest rate by 50 basis points to 4.50%, which marked the tenth consecutive cut and the lowest rate since September 2016. The decision widely met market expectations but was not unanimous, with one member of the five-member board voting for a softer 25-basis-point cut.
Expectations of greater economic slack and largely stable projections for inflation fueled Banxico’s decision to cut the rate once again. While available data indicates that the easing of lockdown measures and strengthening external demand are gradually helping the economy to recover from the blow it received in Q2, elevated uncertainty remains and thus significant downside risks persist. On the price front, despite inflation edging up to 3.6% in July (June: 3.3%), on increasing prices for energy and food, the Bank stated that in the medium and long term, inflation is expected to stabilize roughly above its 3.0% target. That said, Banxico highlighted once again that the balance of risks for the inflation path remains uncertain: A greater-than-expected impact from the widening output gap, reduced price pressures coming from abroad and weaker demand due to pandemic-related restrictions may restrain pressures, although a weaker peso, more persistent core inflation and potential supply chain disruptions may stoke them up.
Looking ahead, the Bank struck a cautious tone, noting that its future stance would “depend on the evolution of the factors that have an incidence on the outlook for inflation and its expectations, including the effects that the pandemic might have on both factors”. Nonetheless, the persisting downside risks to the economic outlook, in combination with the Bank’s assessment that inflation will drop to around its target level over the policy horizon, may lead to further easing.
Commenting on the possible direction of policy ahead, economists at Casa de Bolsa Finamex, noted:
“The end of the easing cycle is around the corner. Although we all know it, it is difficult to calibrate how much more of it remains on the pipeline. For the moment, and until more information regarding the positioning of each member is revealed in the Minutes, two weeks from now, we stick to our expectation of two additional rate cuts of 25 bps each […] that would take the reference to 4.00%.”
The next monetary policy meeting is scheduled for 24 September.