Banixco Holds Neutral Tone

Mexico’s central bank (Banxico) has published the minutes from its monetary policy meeting which was held on August 11th. At that point in time it left the policy rate unchanged at 4.25%, in line with market expectations. In a note to clients on August 26th, Nomura’s Benito Berber explained the house view: “The minutes signaled a neutral bias.”

In dissecting the minutes, the  following paragraph, which Banxico has carefully used in the past, further supports the central banks messaging in which it states: “The majority of the board believes . . . that going forward it will be important to track all aspects that impact inflation dynamics and medium- and long-term inflation expectations, especially the exchange rate and its pass-through into prices. Also, the board will pay attention to the relative monetary position between Mexico and the US without disregarding the output gap.”

“In our view, this paragraph summarizes what the board considers to be the most important factors determining Mexico’s monetary policy.”

If the Mexican peso depreciates (for example due to Trump gaining ground in US election polls, fears related to the fallout from the United Kingdom’s “Brexit” vote, a decrease in oil prices or any other factor), the probability of a rate hike will increase, says Berber. “It’s as simple as that,” he writes.

Following the paragraph from Banixco cited above, the meeting minutes highlighted the opinion of an individual board member. The last few paragraphs of the minutes tend to receive the most attention from so-called Banxico-watchers, and therefore this section is often used to highlight particularly important points. It reads:  “[This board member] believes that under the current circumstances there is no scope for the interest differential between Mexico and the US to decrease as this could imply risk to inflation.”

Further to this, the board made several remarks throughout the minutes about the need for the government to stick to a “prudent” fiscal policy. This, Berber says, is more of a sign and offers a sense that Banxico is signaling to the Finance Ministry that it should target stabilization of the fiscal deficit sooner than in 2018. The Finance Ministry’s message to date has been that Mexico’s debt-to-GDP will stabilize in 2018.