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Mexico Monetary Policy March 2021

Mexico: Banxico stays on hold in March amid rising inflation

On 25 March, the Governing Board of the Bank of Mexico (Banxico) unanimously decided to keep the target for the overnight interbank interest rate at 4.00%, after a 25 basis-point rate cut in the prior meeting.

The decision was likely driven in part by a desire to evaluate the impact of past easing. In addition, recent data suggests activity has been fairly resilient so far this year, while the huge fiscal stimulus recently approved in the U.S. bodes well for the economic outlook. Moreover, inflation rose further above the Bank’s 3.0% target in February and could increase further in the near term due to higher energy prices. Indeed, the Bank slightly raised its short-term forecasts for general and core inflation. As such, additional stimulus would have run the risk of further stoking price pressures.

In its statement, Banxico struck a neutral tone, and did not give explicit guidance on the future direction of the policy rate. While in our March report, most panelists continued to see some additional easing this year, these forecasts are likely to be revised up in the upcoming April publication, in light of rising inflation.

According to Alberto Ramos, economist at Goldman Sachs:

“The window for additional near-term easing has closed and it is now more likely that the next move is a hike rather than a cut. Lingering pressures on inflation (non-core fuel prices, but also sticky core), MXN depreciation pressure, rising dollar yields, and hawkish monetary winds sweeping through the EM landscape (rate hikes in Brazil, Russia, Turkey, Ukraine) fully validate a prudent MPC posture and holding the policy rate at a moderately stimulative 4.00%.”

The next monetary policy meeting is scheduled for 13 May.

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