The central bank of Mexico (Banxico) released the minutes of the September 26 monetary policy meeting in which most board members voted to cut the policy rate by 25-bp (reaching a level of 10.50%). The minutes revealed deputy governor Mr. Jonathan Heath’s arguments to vote for a hold again, in which he called for patience for the current monetary policy stance to have the required effect on services inflation, insisting that easing prematurely could signal complacency with the elevated levels of inflation. Mr. Heath stated that for the moment, a little more time was needed to confirm a trend of the positive signs that had appeared.
On the other hand, the majority of the board appears ready to continue cutting, as two members expressed willingness to discuss larger cuts. The discussion revealed several arguments for members to proceed with the easing cycle. First, one member stated that the evolution of the inflationary outlook, including the dissipation of supply-side shocks and the activity outlook that would allow for further reductions of the policy rate; the same member even stated that the level of core inflation allowed for an assessment of the size of rate cuts. These comments stand in contrast with a more cautious approach from another board member, due to the different shocks that the economy could experience in the following months, in the context of still elevated services inflation; this member called for a risk management-based approach to monetary policy. A third member mentioned that the inflationary outlook was consistent with cuts to the monetary policy rate, as fundamentals still allowed for convergence to the inflation target, and the level of the policy rate still gave room to manage inflationary risks. A fourth member explicitly mentioned that the inflationary outlook allowed for continuous adjustments to the policy rate, even for a discussion on the size of rate cuts.
Our take: Minutes are consistent with our view of Banxico implementing continuous policy rate cuts, with the next monetary policy meeting scheduled for November 14. Our base scenario is for Banxico to cut the policy rate by 25-bp in each of the remaining meetings of the year, reaching an end of year level of 10.00%. The continuity of deputy governor Heath’s dissident vote should depend on the persistence of core services inflation.
Andrés Pérez M.