México Actividad económica May 2023

México: Banxico leaves policy rate unchanged in May

At its meeting on 18 May, the Governing Board of the Bank of Mexico (Banxico) left the overnight interbank interest rate target at 11.25%.

The decision to hold followed 575 basis points of rate hikes since January 2022, and came against a backdrop of declining headline inflation, core inflation and inflation expectations which rendered further tightening unnecessary. On the flipside, with inflation still over double the Central Bank’s 3.0% target and long-term inflation expectations also above target, it was premature to begin cutting rates.

Concerning forward guidance, the Bank stated its intention to “maintain the reference rate at its current level for an extended period”. Several panelists see Banxico starting to loosen its monetary stance by end-2023, while other panelists see rates unchanged this year.

Itau Unibanco analysts said:

“Our end of year policy rate forecast stands at 11.25%, which implies no rate cuts. The central bank is unlikely to cut its policy rate this year given a still difficult disinflationary process and our view of the Fed holding rates throughout 2023. We think that the central bank will only start cutting rates during the first half of next year.”

In contrast, Goldman Sachs’ Alberto Ramos is more dovish:

“The ex-ante real policy rate is now tracking at around 6.35%, visibly above the 3.4% upper-limit of the estimated neutral range. We expect the MPC to hold the policy rate unchanged until at least 4Q2023.”