Mexico: Banxico stands pat in May, keeping the policy rate at 7.50%
May 17, 2018
At its 17 May monetary policy meeting, Banxico’s five-member board voted unanimously to maintain the policy rate steady at 7.50% after pausing its hiking cycle at the previous meeting in April, a move widely in line with market expectations. May’s decision was based on the recent trajectory of inflation, which has been converging towards Banxico’s target, and economic data pointing to a firm recovery in the first quarter.
Banxico highlighted that both headline and core inflation fell in the first quarter. Annual inflation ticked down from 5.0% in March to 4.6% in April as shocks faded and prices for volatile categories receded. Moreover, year-end inflation expectations ticked down just below 4.0%, the upper bound of Banxico’s target, while medium-and long-term expectations hovered around 3.5%. That said, officials commented that inflationary risks remain tilted to the upside. Notable risks include the further depreciation of the peso, which could be set off by a sustained strengthening of the U.S. dollar; tighter global financing conditions; and heightened uncertainty surrounding both the NAFTA renegotiations and the 1 July general elections. Cyclical pressures and agricultural price shocks could also tilt inflation up over the short term.
May’s communiqué remained hawkish despite the Bank holding steady, making clear that rates could still be hiked if necessary. On the other hand, officials appear to have priced in the recent peso sell-off into their inflation forecasts and they still see inflation ticking down over the short term—leaving less room for further rate hikes. Uncertainty over NAFTA talks and the upcoming vote have left officials in a holding pattern, waiting for an outcome or any of the aforementioned risks—including a further depreciation of the peso—to pass before acting. Officials will meet again less than two weeks before the general elections, on 21 June.
Mexico Interest Rate Forecast
The panel of analysts surveyed by FocusEconomics projects that the overnight interest rate target will end 2018 at 7.40%, roughly its current level, as dwindling inflationary pressures are offset by heightened economic and political risk. For 2019, analysts expect the interest rate to drop to 6.40%.
Author: Lindsey Ice, Economist