Banxico: Flexible stance with upside risks – Rabobank

Rabobank’s Molly Schwartz and Christian Lawrence note Banxico kept its overnight rate at 6.50% but significantly softened forward guidance, decoupling Mexican policy from expected Federal Reserve moves. Inflation forecasts are broadly unchanged, with core CPI nudged higher and risks still skewed upward. Rabobank expects Banxico to hold at 6.50%, but sees the balance of risks favouring a future hike.

Policy on hold but guidance softens

"Banxico announced its decision to hold the overnight policy rate at 6.50%, as was largely expected. However, we did see some notable changes to the Banxico monetary policy statement. In particular, the Bank made the following adjustment:"

"Looking ahead, the Governing Board will make its decisions considering the ongoing disinflation process and the expected behavior of its determinants, including the exchange rate pass-through to consumer prices, the slack conditions, and inflation expectations. Since macroeconomic conditions in Mexico are different from those in the United States, monetary policy would not have to react mechanically to the anticipated adjustments to the federal funds rate. The central bank reaffirms its commitment to its primary mandate and the need to continue its efforts to consolidate an environment of low and stable inflation."

"Looking ahead, the Governing Board estimates that it will be appropriate to maintain the reference rate at its current level. It judges that the monetary policy stance is well-suited to face the challenges posed by the macroeconomic environment, including those associated with the international context. The central bank reaffirms its commitment to its primary mandate and the need to continue its efforts to consolidate an environment of low and stable inflation."

"While Banxico has indicated that maintaining the current reference rate may not be appropriate going forward, the Bank also did not signal strong directionality in its statement. Given our outlook that the Fed will hold the overnight policy rate at its current level and that there continue to be pressures on both sides of the balance, we believe Banxico will maintain the overnight policy rate at 6.50% going forward, though the risk is skewed in favour of a hike."

"Inflation expectations from the Bank remain largely unchanged, with small upward adjustments in core CPI projections for Q3 and Q4 of this year. As oil prices climb, however, the upside risk to the Bank’s inflation outlook climbs as well. The Bank also notes the deflationary effect of persistent slack in the Mexican economy, but states that the “balance of risks for the trajectory of inflation within the forecast horizon remains biased to the upside”."