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Mexico Monetary Policy December 2023

Mexico: Central Bank keeps rates stable in December

At its meeting on 14 December, the Governing Board of the Bank of Mexico (Banxico) left the overnight interbank interest rate target at 11.25%, where it has been since March. This comes after 725 basis points of hikes from early 2021 to early 2023.

The decision not to hike further was likely driven by the declines in headline and core inflation registered in recent months. That said, with both indicators above the upper bound of the Central Bank’s 2.0–4.0% target range, multiple upside risks to the inflation outlook, still-robust economic activity and a strong labor market, it was premature to begin cutting rates.

Banxico reiterated that the policy rate “must be maintained at its current level for some time” in order to tame inflation. All panelists see rate cuts next year. However, there is a 300 basis-point discrepancy among panelists over the end-2024 rate.

On the outlook, Itaú Unibanco analysts said:

“We think that a first rate cut is likely in 1Q24. While the hawkish tone of the statement increases the odds of the start of the easing cycle in March, we do not rule out a rate adjustment in February given the shift in the Fed’s guidance. Still looking forward, we think there are still relevant upside risks to inflation next year (such as, a large expansionary fiscal stance and another large minimum wage hike) which could lead Banxico to maintain a restrictive policy stance for longer.”

Scotiabank analysts took a similar view:

“Going forward, we maintain the expectation of a first rate cut in the first quarter of 2024. However, the possibility of staggered cuts is broader. This contrasts with the forward guidance given by the Fed at Wednesday’s meeting, where it signaled a steeper pace of monetary easing over the next year. Thus, the rate spread could widen in 2024.”

However, EIU analysts were more hawkish:

“We expect the Banco de México (Banxico, the central bank) to keep its policy rate at the current peak of 11.25% until the end of the second quarter of 2024. Steady disinflation will take headline inflation below the upper bound of Banxico’s 2-4% target range by mid-2024.”

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