Banxico minutes signal long rate pause as inflation eases
The minutes of the Bank of Mexico (Banxico) August meeting showed that the central bank is expected to hold rates steady for some time, despite the resumption of the disinflation process.
At the August 6 meeting, Banxico kept the main interest rate reference unchanged at 6.50%, as expected and unanimously. In the statement, policymakers recognized that the current level is appropriate given the uncertain global backdrop and inflation risks tilted to the upside.
Regarding external shocks, Banxico said that the “escalation of the Middle East conflict could negatively affect global economic activity” and pose upside risks to inflation. Most members said that despite the expansion of the Gross Domestic Product (GDP), the “output gap remains in negative territory.”
Key highlights:
BANXICO GOVERNING BOARD ESTIMATES THAT IT WILL BE APPROPRIATE TO MAINTAIN THE REFERENCE RATE AT ITS CURRENT LEVEL - MINUTES
MOST BANXICO MEMBERS HIGHLIGHTED THE PERSISTENCE OF GLOBAL UNCERTAINTY
MOST MEMBERS COMMENTED THAT THE ESCALATION OF THE MIDDLE EAST CONFLICT COULD NEGATIVELY AFFECT GLOBAL ECONOMIC ACTIVITY
MOST MEMBERS NOTED THAT THE PERSISTENCE OF THE CONFLICT IN THE MIDDLE EAST CONTINUES POSING UPSIDE RISKS TO INFLATION
MOST MEMBERS POINTED OUT THAT, DESPITE THE EXPANSION OF GDP IN THE LATEST QUARTER, THE OUTPUT GAP REMAINS IN NEGATIVE TERRITORY
ONE MEMBER CONSIDERED THAT THE ECONOMIC GROWTH RATE IN 2026 COULD EXCEED BANCO DE MEXICO’S CURRENT FORECAST OF 1.1%
ALL MEMBERS POINTED OUT THAT THE DECLINE IN CORE INFLATION WAS DRIVEN BY THE FALL IN MERCHANDISE INFLATION
ONE MEMBER EXPRESSED THAT THE BALANCE OF RISKS FOR ECONOMIC ACTIVITY REMAINS BIASED TO THE DOWNSIDE
MOST MEMBERS POINTED OUT THAT HEADLINE AND CORE INFLATION ARE STILL EXPECTED TO DECLINE THROUGHOUT THE FORECAST HORIZON, ALBEIT MORE GRADUALLY THAN PREVIOUSLY ANTICIPATED
MOST MEMBERS CONSIDERED THAT THE BALANCE OF RISKS FOR THE TRAJECTORY OF INFLATION WITHIN THE FORECAST HORIZON REMAINS BIASED TO THE UPSIDE
MOST MEMBERS SPECIFIED THAT THE ADJUSTMENT OF THE PROJECTED TRAJECTORY IS PARTLY DUE TO THE CONTINUED PERSISTENCE OF SERVICES INFLATION
THE MAJORITY NOTED THAT, LOOKING AHEAD, THE DETERMINANTS OF INFLATION WILL REMAIN CONSISTENT WITH THE OUTLOOK OF LOWER INFLATIONARY PRESSURES
ONE MEMBER SPECIFIED THAT THE INTENSIFICATION OF THE EL NIÑO PHENOMENON IN THE SECOND HALF OF THE YEAR COULD EXERT DIRECT INFLATIONARY PRESSURES AND LIKELY GENERATE SECOND-ROUND EFFECTS
Banxico FAQs
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%.
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.
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.
