The central bank of Mexico (Banxico) released the minutes of June's monetary policy meeting in which most board members voted for keeping the policy rate unchanged at 11.00%, amid heightened post-election volatility. The minutes revealed that deputy governor Omar Mejía’s minority vote for a 25-bp cut, was based on his view that the economy was experiencing two inflationary shocks in opposite directions: currency depreciation versus weaker than expected activity. He added that the level of contractionary monetary policy should reflect the progress of the disinflationary process and greater slack conditions.
Besides Omar Mejía, two more board members seem open for resuming rate cuts in the next meeting, in our view. One member said that if aggregate demand conditions contribute to more favorable price dynamics, rate cuts could resume. Another member noted that core inflation, which better reflects inflationary trends, continued decreasing. The same member highlighted that the central bank is in a stage where progress in disinflation and the prevailing degree of monetary restriction allow to discuss possible reference rate cuts.
The remaining board members were more cautious on the monetary policy outlook, but with one of them not discarding rate cuts. One board member noted that challenges of the persistence of core inflation and of a slowdown in the disinflation process have continued, in addition to an unforeseen shock of financial volatility. The same member mentioned the risk that the monetary restriction might be insufficient to achieve such convergence if the reference rate is reduced or if inflation expectations increase. Another member deemed it was not necessary to lower the reference rate before there was greater certainty of core inflation (including services) displaying a clear convergence to the 3% target. Still, the same member noted that a strategy of occasional and gradual data dependent calibrations to monetary policy stance were adequate, maintaining the ex-ante real interest rate in a 7-7.5% range.
Our take: The monetary policy minutes suggest that at least three board members are open for a rate cut in the next meeting (of which one already voted for a rate cut in June). Even one of the board members which had a hawkish tone in the minutes did not rule out fine-tuning adjustments in the policy rate. Overall, we think the minutes are consistent with our base scenario of the central bank cutting its policy rate by 25-bp in the August meeting. Certainly, bouts of volatility related to post-election uncertainty risk another pause. There are two more inflation prints before the August 8 monetary policy meeting.