Mexico: Banxico stays put in September, earthquake impact on growth and inflation will be limited
September 28, 2017
The Central Bank of Mexico (Banxico) kept the policy rate unchanged at 7.00% at its 28 September monetary policy meeting, the second consecutive meeting at which it stands pat following a 400-basis-point tightening cycle carried out over the course of last year. The decision, which was unanimous among Board members, reflected a deterioration in the balance of risks for both growth and inflation, warranting the Bank’s current tight stance.
The assessment on growth was conspicuously less upbeat in September as officials noted that economic activity growth in July had been surprisingly soft and concerns around tail risks linked to NAFTA talks persist. In addition, the Board indicated that the impact of the recent earthquakes would be moderate but temporary, with limited implications in longer-term projections. The Board highlighted that the peso has come under pressure recently, but ruled out the possibility of the currency weakening on the back of higher U.S. interest rates before year-end.
Banxico suggested that inflation had peaked, citing data for the first half of September that pointed to easing price pressures. However, officials noted that the overall balance of risks for inflation had deteriorated in recent weeks as knock-on effects following the earthquakes could cause goods shortages and reinvigorate price pressures. The Bank kept unchanged the remaining factors affecting the balance of risks. On the upside, these included potential second-order effects linked to simultaneous transitory shocks earlier this year and the risk of mounting wage pressures from a tightening labor market. On the downside, a further appreciation in the peso and low energy prices could weigh on inflation moving forward.
The Bank struck a somewhat dovish tone as officials were more cautious regarding inflation. The statement stressed the negative effects of higher rates on economic activity. Officials seemed more focused on acknowledging the risks and potential future shocks on prices and growth rather than establishing a clear path ahead for the Bank’s monetary policy. Our panel sees the Bank staying put for the remainder of this year before beginning to ease next year. The easing cycle, however, is unlikely to start until the peso stabilizes, inflation begins to fall rapidly and key political risks—including NAFTA talks and general elections next year—fade.
Author: David Ampudia, Economist