After today’s board meeting, the Bank of Mexico, as expected left the key interest rate unchanged at 8.25%. According to analysts from TDS, the Banxico believes the near term pickup in inflation is transitory, but its focus on wage increases and cost pressures implies a high level of vigilance and little room to cut rates in 2019.
Key Quotes:
“Banxico's statement has placed a substantial focus on recent developments in core and non-core inflation. Core inflation pressures were seen as due to certain food prices as well as services which were partly bolstered by the Easter holiday.”
“In its risk outlook for inflation, Banxico continued to sound concerned with wage dynamics (...) The concern is that this could create cost pressures and hurt formal employment, as well as sustain high core inflation levels. These risks are compounded by still high inflation expectations, and leave the central bank still seeing the balance of risks for inflation tilted to the upside.”
“We believe it is the case that if there is any indication that great-than-productivity wage increases are having a broad impact on costs, which are then being passed on to the overall price complex (particularly services), then it is likely that Banxico could be forced into action.”
“We believe that it is completely unjustified for the market to price in any potential rate cuts before the end of the year. This statement reflects hawkish concern, and while not saying that more action is coming, it for the time being closes the door on any notion that the next "certain" step in the policy rate this year is lower.”
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