Mexico: Banxico slashes key rate and unveils liquidity measures in March to combat coronavirus impact
March 20, 2020
In a surprise out-of-cycle meeting on 20 March, the Governing Board of the Bank of Mexico (Banxico) decided to slash the target for the overnight interbank interest rate by 50 basis points to 6.50%, marking the sixth consecutive cut and the largest since June 2014. The meeting was brought forward from the original meeting scheduled for 26 March and saw one of the five-member Board call for a smaller 25-basis-points cut. Banxico also announced a series of measures to facilitate liquidity and help smooth the functioning of financial markets which have been roiled by the coronavirus fallout.
The Bank’s decision was driven by its assessment that the fast-spreading Covid-19 and adverse impact on domestic activity, which comes against the backdrop of a weaker global economy and crash in international oil prices, will likely lead to greater economic slack ahead, thus deteriorating growth prospects. On the inflation front, although Banxico deemed that inflation will converge to its target over its policy horizon, it stressed that uncertainty over the inflation outlook has increased given the presence of both upside and downside risks. In particular, the negative output gap and lower energy prices could keep a lid on inflationary pressures, but the sharp depreciation of the currency could push pass-through inflation higher.
Banxico’s additional measures to free up liquidity in financial markets included reducing by MXN 50 billion the monetary regulation deposit that banks are required to hold and cutting the rates to which they can access Central Bank liquidity. Moreover, Banxico will offer credit auctions in U.S. dollars to banks by making use of the swap line with the U.S. Federal Reserve and will ramp up facilities so that market makers can further support the functionality of the government bond market.
In terms of forward guidance, the statement struck a dovish tone by highlighting the complex global situation amid the rapid spread of Covid-19; the severely deteriorated outlook for the global economy; and the extraordinary policy measures taken by central banks worldwide. Against this backdrop, Banxico stressed that it will take the necessary actions according to available information and policy will be adjusted accordingly so that inflation converges to target. As things stand, the Bank is likely to further ease its stance ahead, though uncertainty remains over the pace at which it will cut and whether it will even hold additional extraordinary meetings amid a rapidly-changing scenario.
The next monetary policy meeting is scheduled for 14 May.
Author: Javier Colato, Economist