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Mexico Monetary Policy December 2020

Mexico: Banxico remains on hold in December

At its 17 December meeting, the Governing Board of the Bank of Mexico (Banxico) decided to keep the target for the overnight interbank interest rate unchanged at 4.25%, marking the second hold in successive meetings after delivering a total of 400 basis points in cuts since August 2019. Although largely expected by market analysts, the decision was not unanimous as two of the five-member board—one more than at November’s meeting—voted for a 25-basis-point cut. It also surprised market analysts, the majority of whom had expected the Bank to ease its stance once again. Banxico’s decision to maintain rates steady came amid a reduction in price pressures in November, with inflation falling to 3.3% from October’s 17-month high of 4.1%. Furthermore, expectations for inflation for the coming year also reduced to around the midpoint of the Bank’s 2.0–4.0% target band. 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. As such, the Bank saw it necessary to take a wait-and-see approach in order to both confirm the inflation trajectory and provide support to the ongoing economic recovery.

In terms of forward guidance, Banxico struck a mildly dovish tone in its statement, indicated by its continued reference to the latest move as a “pause” in policy easing, and by the increasing number of members voting for a further rate cut.

To that end, economists at Casa de Bolsa Finamex noted:

“We believe that the lower levels of observed inflation and short-term inflation expectations will continue giving space for additional nominal rate reductions in the near future, [and so] we move forward our expectations of a 25 bps rate cut from May to March, and acknowledge that, under particular conditions, the rate cut could even take place as soon as in the next monetary policy meeting in February.”

The next monetary policy meeting is scheduled for 11 February 2021.

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