Banxico minutes flag upside inflation risks from Middle East conflict

Christian Borjon Valencia FXStreet

Banco de Mexico (Banxico) released its latest meeting minutes on Thursday, in which the Middle East conflict dominated the board's discussion.

On May 7, Banxico cut rates by 25 basis points to 6.50%, while telegraphing that the easing cycle that began in 2024 is over. The decision was not unanimous, with a 3-2 vote, with Deputy Governors Galia Borja and Jonathan Heath voting to hold rates unchanged.

All the members of the board expressed that risks to inflation are tilted to the upside, due to the Middle East conflict, though they “argued that their direct impact on inflation in Mexico has been limited,” the minutes revealed.

Key highlights:

MOST BOARD MEMBERS AT BANXICO'S MAY MEETING CONSIDERED BALANCE OF RISKS FOR TRAJECTORY OF INFLATION REMAINS BIASED TO THE UPSIDE

ALL BANXICO BOARD MEMBERS HIGHLIGHTED THE UPWARD RISKS RELATED TO THE MIDDLE EAST CONFLICT

MOST BANXICO BOARD MEMBERS INDICATED THAT THE CONTRACTION OF ECONOMIC ACTIVITY WAS THE RESULT OF DECLINES ACROSS ITS THREE MAJOR SECTORS

MOST BANXICO BOARD MEMBERS MENTIONED THAT ECONOMIC ACTIVITY IN MEXICO CONTRACTED DURING THE FIRST QUARTER NOTABLY GREATER THAN ANTICIPATED

BANXICO'S BORJA: ADOPTING A CAUTIOUS APPROACH AND MAINTAINING THE CURRENT POLICY STANCE IS ADEQUATE TO HAVE MORE INFORMATION THAT ALLOWS US TO ASSESS MORE ACCURATELY THE INFLATIONARY OUTLOOK

BANXICO'S HEATH: THE NARROW MARGIN FOR FURTHER RATE CUTS AND FOR REDUCING THE DIFFERENTIAL WITH RESPECT TO EXTERNAL RATES, ALONG WITH AN ELEVATED UNCERTAINTY, JUSTIFIES PAUSE

BANXICO'S HEATH CITES SUSTAINED CORE INFLATION AS WELL AS PRICE SHOCKS, MILITARY CONFLICTS AND FISCAL ADJUSTMENTS

ONE BANXICO BOARD MEMBER SAID AS EVOLUTION OF PRICE SHOCKS IS STILL UNCERTAIN, UPSIDE RISKS TO INFLATION IN THE MEXICAN ECONOMY REMAIN CONTAINED

MOST BANXICO BOARD MEMBERS MOST MEMBERS POINTED OUT THAT SLACK CONDITIONS ARE EXPECTED TO CONTINUE WIDENING AND REDUCE INFLATIONARY PRESSURES

Banxico FAQs

What is the Bank of Mexico?

The Bank of Mexico, also known as Banxico, is the country’s central bank. Its mission is to preserve the value of Mexico’s currency, the Mexican Peso (MXN), and to set the monetary policy. To this end, its main objective is to maintain low and stable inflation within target levels – at or close to its target of 3%, the midpoint in a tolerance band of between 2% and 4%.

How does the Bank of Mexico’s monetary policy influence the Mexican Peso?

The main tool of the Banxico to guide monetary policy is by setting interest rates. When inflation is above target, the bank will attempt to tame it by raising rates, making it more expensive for households and businesses to borrow money and thus cooling the economy. Higher interest rates are generally positive for the Mexican Peso (MXN) as they lead to higher yields, making the country a more attractive place for investors. On the contrary, lower interest rates tend to weaken MXN. The rate differential with the USD, or how the Banxico is expected to set interest rates compared with the US Federal Reserve (Fed), is a key factor.

How often does the Bank of Mexico meet during the year?

Banxico meets eight times a year, and its monetary policy is greatly influenced by decisions of the US Federal Reserve (Fed). Therefore, the central bank’s decision-making committee usually gathers a week after the Fed. In doing so, Banxico reacts and sometimes anticipates monetary policy measures set by the Federal Reserve. For example, after the Covid-19 pandemic, before the Fed raised rates, Banxico did it first in an attempt to diminish the chances of a substantial depreciation of the Mexican Peso (MXN) and to prevent capital outflows that could destabilize the country.

Author

Christian Borjon Valencia

FXStreet

Markets analyst, news editor, and trading instructor with over 14 years of experience across FX, commodities, US equity indices, and global macro markets.

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