Mexico Monetary Policy


Mexico: Banxico surprises with first rate cut since 2009

March 8, 2013

At its 8 March meeting, the Central Bank (Banxico) voted to cut the monetary policy rate by 50 basis points to 4.00%. While several analysts were expecting a rate cut this year, the timing of the decision surprised most of the market, as the move was expected to take place later in the year. The last time Banxico had adjusted interest rates was in July 2009.

The Bank noted that downside risks to global growth persist as a result of the fiscal consolidation currently taking place, especially in the United States, where the sequester - a set of automatic spending cuts amounting to USD 1.2 trillion over the next nine years - came into effect on 1 March. Banxico also noted that indicators related to the domestic sector were now pointing to a deceleration as well.

On the monetary side, the Bank mentioned that inflation is expected to rise in the months ahead on the back of a low base of comparison, but that it will fall back to levels close to 3.0% before the end of the year. Moreover, monetary authorities stated that in past years the level, volatility and persistence of inflation had been reduced. According to Banxico, there has been low incidence of second-round effects after adjustments in relative prices, such as the exchange rate or commodities, and inflation expectations remained well anchored. The Bank stated that all these conditions provided a favourable backdrop for a reduction of interest rates without compromising the convergence to the permanent inflation target of 3.0% in the medium term.

Banxico emphasised that the interest rate cut implemented this month was a one-off move and that it does not represent the beginning of an easing cycle. LatinFocus Consensus Forecast panellists currently expect the Bank to stay put this year and leave interest rates at 4.00%. For next year, most panellists expect Banxico to tighten the reins, resulting in a 4.32% year-end projection.


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