Mexico Monetary Policy August 2016

Mexico

Mexico: Central Bank holds rates in August after hefty increase in June

August 11, 2016

Mexico’s Central Bank held a monetary policy meeting on 11 August and decided to leave the overnight interest rate target unchanged at 4.25%, in line with market expectations. The Bank’s move followed a hefty 50-basis-point rate increase in June that aimed to support the peso, which had been hit hard by the market turmoil set off by the UK’s unexpected vote to leave the EU. Banxico has hiked the monetary policy interest rate three times this year by a total of 125 basis points since the Federal Reserve raised interest rates in December last year.

The Central Bank commented that the balance of risks surrounding the country’s economic growth has deteriorated since the rate increase in June at a time when growth prospects for the global economy continue to be revised downwards. The Bank highlighted that Mexico’s GDP growth showed a 0.3% quarter-on-quarter contraction in Q2, reflecting a stagnation in the industrial sector, weak growth in services, a slowdown in private consumption and still lackluster performance in exports and investment, all of which kept the output gap negative. Moreover, Banxico said that the exchange rate of the peso against the U.S. dollar had experienced heightened volatility in response to the UK’s decision to leave the EU. New episodes of financial market volatility cannot be ruled out on the back of geopolitical risks, the possible consequences of the U.S. presidential elections and the normalization of U.S. monetary policy.

Due to the aforementioned circumstances, the Central Bank emphasized the importance of maintaining sound macroeconomic fundamentals, including consolidating public finances to absorb international shocks more efficiently and reinforcing an adequate current account balance. As in previous statements, Mexico’s monetary authority said that it is closely monitoring all determinants of inflation, especially the currency depreciation and the possible transfer of second-round effects to consumer prices. Inflation remains below the Bank’s 3.0% target and the Mexican peso—the most traded currency among emerging-market currencies—continues to face strong volatility. One of the most telling lines of the statement is that the Central Bank now expects that inflation, “by year end will be slightly above 3.0%, but the average for the whole year will be below 3.0%.”

In the end, Mexico’s Central Bank showed less inclination than previously to hike interest rates in the near term, but analysts remain cautious. Gabriel Lozano, Mexico Chief Economist at J.P. Morgan, commented:

“Today’s statement showed less urgency to hike ahead, with the board tempering down its hawkish rhetoric, appearing at ease with respect to inflation risks, somewhat concerned about deceleration in economic activity after the economy contracted in 2Q and removing the current account deficit (CAD) from its reaction function. While we are maintaining our call for a 25bp hike on September 29, we acknowledge today’s dovish statement reduces the odds for a hike, which will be contingent on the performance of the currency and on inflation dynamics.”

Meanwhile, Benito Berber, Senior Latam Strategist at Nomura, said:

“In our view, Banxico is already incorporating the factors that could be a source of concern about future inflation (such as the second-order effects of MXN depreciation and gasoline price hikes) and telling us that they will not seriously threaten the bank's inflation forecast. Furthermore, Banxico is suggesting that the previous 50bp increase was preemptive (Banxico probably knew in the previous monetary policy meeting that gasoline prices would go up to the top of the +/-3% band), which is why the outlook for inflation is 'neutral' and has not worsened.”

An additional factor to consider in Banxico’s monetary policy making going forward is the normalization of interest rates in the U.S. Alexis Milo, Chief Mexico Economist at HSBC, commented:

“The implications for monetary policy in 2016 and 2017 that we take from today's decision is that Banxico will stay on hold and hike in tandem with the Fed next year. We maintain our view that the last hike was a front-loading of the tightening cycle to be followed this year to support the FX, rather than the beginning of a faster sequence of hikes. In this regard, the negative tone on growth and eased concerns about inflation that we see in the communiqué following the decision is consistent with our view. Nevertheless, our view is highly dependent on the evolution of the exchange rate, so additional hikes may take place if the USD/MXN goes again above 19, which is not our central scenario for the next 12 months”

On average, the view of the panel of analysts surveyed by FocusEconomics is that the target of the overnight interest rate will end 2016 at 4.36%. For 2017, forecasters see the target of the overnight interest rate ending the year at broadly 5.05%.


Author:, Senior Economist

Sample Report

Looking for forecasts related to Monetary Policy in Mexico? Download a sample report now.

Download

Mexico Monetary Policy Chart


Mexico Monetary Policy August 2016 4

Note: Banxico target rate (Tasa objetivo de fondeo bancario) in %.
Source: Mexico Central Bank (Banxico).


Mexico Economic News

More news

Search form