The central bank of Mexico (Banxico) released the minutes of February's monetary policy meeting, in which the board unanimously maintained the policy rate at 11.25%, as expected. All members seem to be open to discuss a rate cut in the next meeting, with the decision heavily dependent on data evolution.
Three Board members seem more willing to cut the policy rate in the next meeting. One member, downplayed the non-core inflation rebound, noting that said index is highly volatile and that core inflation, which continues to decline, better reflects the trend. Other member noted that the monetary restrictiveness attained is more than double the inflationary gap, which is more than the past when inflation was above 4% and compared to both emerging and advanced economies. If the interest rate is not adjusted this difference will widen. A third member mentioned that although the balance of risks for inflation remains biased to the upside, it is less adverse than the one prevailing at the start of 2023. The same member highlighted that a downward adjustment in the interest rate would not prevent the continuation of a restrictive stance, noting also that the adjustments to the policy rate will be gradual given the non-linearity of the disinflation process.
Other two member seem more cautious on the inflation environment, noting the rebound in non-core inflation. One member noted the risks of a rebound in non-core inflation started to materialize, with the possibility that it stabilizes at levels above what the central bank forecast. The same member also mentioned that there is a possibility to maintain the current level of the reference rate longer than anticipated by market. Other member noted there is no certainty of non-core inflation rebound being temporary (and could also spillover into core inflation) and before beginning a cycle of rate cuts, core inflation, particularly services CPI, must show less persistence. The member highlighted that any eventual downward adjustment to the policy rate should not be interpreted as the beginning of the easing cycle.
Our take: The tone of the minutes seems consistent with a rate cut of 25-bp in the March meeting. While two Board members seem more cautious for a rate cut in the next meeting given the risks associated to a rebound in non-core inflation, today’s inflation figures, where non-core inflation slowed, eases those concerns. Our end of year policy rate forecast stands at 9.50%.