Mexico: Banxico trims key rate to three-and-a-half year low in May
May 14, 2020
At its 14 May meeting, the Governing Board of the Bank of Mexico (Banxico) decided to lower the target for the overnight interbank interest rate by 50 basis points to 5.50%, marking the eighth consecutive cut and the lowest since November 2016. The decision was unanimous and came in line with what market analysts had expected.
The economic and financial fallout of the Covid-19 pandemic prompted the Bank to loosen its stance once again. Economic activity contracted heavily in the first quarter, recording its steepest decline since the 2009 global financial crisis as the pandemic started to take its toll. In addition, Banxico warned that the second quarter will fare even worse and massive job losses are expected ahead. On the price front, inflation dropped to an over four-year low of 2.1% in April (March: 3.2%) as a result of lower fuel prices and Banxico noted that short-term expectations for inflation have also eased. That said, the Bank highlighted once again that the balance of risks for the inflation path remains highly uncertain: A wider output gap and subdued energy prices are restraining pressures but a weaker peso and potential value chain disruptions are stoking them up.
In terms of forward guidance, the statement struck a relatively dovish tone by stressing the amplified risks to the economic outlook. Additional easing is largely expected ahead given the ample room Banxico still has available; the country currently has one the highest real rates in the world. That said, the regulator is likely to proceed with caution given the risks of adding pressure to the currency and triggering capital flight. Against this backdrop, Banxico stressed that it will take the necessary actions according to available information and in consideration of the pandemic’s impact on economic activity so that inflation converges to target.
The next monetary policy meeting is scheduled for 25 June.
Author: Javier Colato, Economist