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Mexico Monetary Policy November 2019

Mexico: Banxico slashes rate for third time in a row in November

At its 14 November meeting, the Governing Board of the Bank of Mexico (Banxico) decided to lower the target for the overnight interbank interest rate by 25 basis points to 7.50%, marking the third consecutive cut and coming in line with market expectations. The move, however, was not unanimous as two of the five Board members voted for a sharper, 50-basis-point reduction.

The Board’s decision was motivated by contained headline inflation, growing economic slack and the behavior of yield curves domestically and abroad. Inflation has trended down recently, landing at Banxico’s 3.0% target for the second month in a row in October. However, despite easing slightly in the same month, the stickiness of core inflationary pressures remained a source of concern for the Board. On the growth front, data has disappointed, with a GDP flash estimate showing a stagnant economy through Q3, which the Bank took as an indication that economic slack is widening faster than initially anticipated. In light of this, the Bank also announced a downgrade to its growth forecasts for this year and next from the last quarterly inflation report, while anticipating only a slightly lower inflation path ahead.

In terms of forward guidance, the communiqué held a broadly neutral tone, reinforcing the Bank’s cautious approach to setting policy. As in September’s meeting, the Bank acknowledged the presence of both upside and downside risks to inflation. Persistent core inflationary pressures; wage increases above productivity growth; a weaker peso; U.S.-tariff threats; and higher-than-expected price increases for energy and farm products could stoke inflation, while an appreciation of the currency and wider-than-anticipated slack could pressure inflation down. Accordingly, as stated in the previous September meeting, the Bank will maintain its prudent stance going forward and policy will be adjusted in a timely and firm manner should risks materialize.

The next monetary policy meeting is scheduled for 19 December.

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