On Thursday, the Bank of Mexico kept its key interest rate unchanged at 4.25%, against some expectations of a 25bps cut. Economist at BBVA Research expects Banxico to remain on the sidelines in December. They point out future movements will only be possible if inflation eases towards 3.0-3.5% and explain that with the decision, Banxico clearly signals that the real policy rate will remain above 0.0%.
Key Quotes:
“Banxico opted once again to be backward looking instead of forward looking as they decided to pause while acknowledging that non-core inflation was behind the most recent increase –likely, this forced the upward revision to their short-term inflation projections– and that they continue to expect inflation to gradually converge to 3.0%. This in a context, which the board acknowledges, of “ample slack conditions in the horizon where monetary policy operates”. It is hard to reconcile this with the decision to stop the easing cycle.”
“It now seems clear that Banxico will remain on the sidelines in December but the case for a resumption of rate cuts will likely become stronger in early 2021 with a weak economy, a strong peso and with inflation coming down. Future monetary policy decisions will rest mostly on current inflation, as opposed to expected inflation as it should be the case. Banxico is now an outlier in a situation where most central banks that have inflation under control and a large output gap have taken monetary policy rates to negative territory.”
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