Banxico Minutes: Hawkish Cut and Different Views
Banxico's recent meeting minutes reveal a split among board members regarding monetary policy, with a 25bps rate cut to 11.0%. Despite progress in curbing inflation, differing views on policy direction persist. Inflation expectations deviate from targets, with potential risks in fiscal policy and wage inflation. While a unanimous decision was lacking, forecasts suggest a continued rate cut trend, albeit with uncertainty. Banxico's communication remains data-dependent, with potential for alignment in policy views by late 2024. We continue to see Banxico maintaining a 25bps pace cut.
Figure 1: Mexico’s Policy Rate and Real Ex-Ante Policy Rate (%)
Source: Banxico and Continuum Economics
The Mexico Central Bank (Banxico) has released the minutes of its last meeting, in which it cut the policy rate by 25bps to 11.0%. In general, the minutes highlighted the differing views of its board members on the conduct of monetary policy. The members were not fully aligned on the decision, nor on the communication, which is likely the reason why their communique left no clues about the next steps in terms of monetary policy.
Overall, the members agreed that progress has been made on the inflation front, with rates falling consistently since they began raising rates. Additionally, since they paused the hiking cycle in March 2023, the real ex-ante policy rate (discounting inflation expectations) has increased from 6.0% to around 7.4% as 12-month inflation expectations dropped. However, inflation expectations are not aligned with the 3.0% target; for 2024, they stand at 3.9%, and for 2025, they are at 3.4%. Additionally, some members highlighted risks for 2024. First, fiscal policy will be looser, which could translate into inflationary pressures. Additionally, recent estimations of the output gap point to a positive gap, and wage inflation is running well above general inflation.
The decision to cut the rate was not unanimous, with one member voting to maintain it at 11.25%. However, three different views could be seen in the minutes. The first one advocates for a continuous cutting cycle, highlighting progress made in lowering inflation and suggesting that a slow cut could maintain monetary policy tight and promote inflation convergence. The second view is aligned with a marginal adjustment, consistent with a pause. This view advocates for a 100bps adjustment, which would keep the ex-ante rate at the same level as the beginning of the cycle, around 6.25%, resulting in a policy rate of around 10.25%. The sole view of Irene Espinoza advocated for not cutting, as this could indicate complacency with high levels of inflation, which could jeopardize Banxico’s conduct of monetary policy.
Our assessment of the minutes indicates that Banxico's style of communication will continue to be somewhat vague and reliant on data. It is very likely that split decisions will continue to be seen in the votes. However, we have no reason to change our forecasts. We believe Banxico will continue to cut the policy rate by 25bps, which will continue to be the majority view of the members. Additionally, as the impact of fiscal policy on inflation becomes clearer, a more aligned view of Banxico could begin to be seen in the latter half of 2024. Our forecast for the policy rate is to end at 9.5% in 2024 and 7.5% in 2025.