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Mexico Monetary Policy June 2019

Mexico: Banxico tilts dovish as it holds rates in June

Banxico’s Governing Board voted on 27 June to leave the target for the overnight interbank interest rate at 8.25%, as had been widely expected by analysts. The decision, however, was not unanimous; one policymaker opted for a 25-basis-point rate cut. All told, Banxico has thus far stayed put this year after two consecutive rate hikes—in response to financial-market volatility—in the fourth quarter of last year.

The Governing Board’s dovish tilt reflected tepid growth prospects and heightened economic uncertainty. Although the United States eventually shelved plans to impose tariffs on Mexican imports before they went into effect in early June, much of the damage had already been done; the gut-punch to economic sentiment only reinforced a sense of shakiness underfoot. Moreover, what appears to have been dismal first-half growth was only compounded in recent weeks by renewed concerns over fiscal slippage and additional credit-rating downgrades. Policymakers argued that, taken together, these economic woes—and their inherent uncertainty—shifted the balance of risks to inflation toward neutrality (from an upside tilt), leaving the Governing Board with few alternatives but to reconsider the possibility of some monetary loosening through the remainder of the year.

Slack in the economy demanded Banxico’s dovish pivot, although policymakers urged caution given excessive economic uncertainty. Particularly, they continue to focus on externally-driven depreciation of the peso, which would upend the current trajectory of inflation. That said, increasingly accommodative monetary policy in the U.S. and elsewhere is likely to leave Banxico with some room to nurse the ailing economy. Meanwhile, analysts widely expect the current tightening cycle to have reached an end and instead see policymakers lowering rates gradually over the short-term in a bid to stimulate economic activity.

Commenting on Banxico’s recent about-face, Alexis Milo, chief economist and head of research for Mexico at HSBC, noted:

“We perceive that Banxico maintained a cautious tone on inflation, as upward risks continue to dominate and some of them may stay for longer. However, we think that the central bank introduced and emphasized some dovish elements, which were not present in previous policy decisions. In particular, we think that more accommodative monetary stances globally and potential effects from slower-than-expected growth on prices, especially within the core component, may become more relevant for Banxico’s mindset. […] Hence, it will prove key to follow the evolution and potential pace of decline of core inflation before Banxico’s next policy announcement on 15 August. We continue to see that core inflation will not fall below 3.5% in the remainder of 2019, which, combined with sticky inflation expectations above the target level, supports our out-of-consensus view that Banxico will keep the policy rate unchanged at 8.25% for the rest of 2019.”

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