Mexico: Banxico holds rates in May, keeps cautious tone
At its 16 May monetary policy meeting, Banxico’s governing board unanimously voted to leave the target for the overnight interbank interest rate at 8.25%, matching market analysts’ expectations. The target rate has been on hold at the decade high this year after it was hiked twice consecutively in Q4 2018 amid financial volatility.
The board’s decision reflected lingering concerns over high price pressures in Mexico’s economy. Inflation jumped above Banxico’s target range in April amid higher core consumer prices and, in its accompanying statement, the Bank stressed that inflation expectations have increased over both the short- and medium-term. This comes despite a weak economic backdrop, with GDP having contracted on a sequential basis in Q1, according to the flash estimate.
Looking ahead, Banxico struck a cautious and hawkish tone in their communiqué, suggesting that rates will likely stay at the record high in the coming months. Although the Bank recognized the “weak performance” of the Mexican economy in the first quarter, it stressed upside risks to the price outlook, particularly regarding the peso, and that “the balance of risks for inflation relative to its forecasted trajectory still remains to the upside.”
All of our panelists project that the Bank has reached the end of its tightening cycle and will either hold rates or begin to gradually unwind its monetary policy in efforts to stimulate economic activity. Summarizing JPMorgan’s view, Gabriel Lozano and Steven Palacio noted:
“We think markets should be prepared to see several non-consensus decisions before the next shift in the policy rate. All in, we continue to expect the first cut in 1Q20 but we see some risks that rates will be on hold for longer.”