MNI STATE OF PLAY: Banxico Inclined To Cut; Inflation A Hurdle

The Bank of Mexico will consider an additional quarter-point interest rate cut to 3.75% as the economic recovery remains fragile and Covid vaccinations get off to a slow start, but market volatility and a spike in inflation toward the top of its target range will complicate deliberations at Thursday's meeting.

Minutes were generally dovish in tone after Banxico's February meeting, at which it cut rates by 25 basis points to 4% in a unanimous decision last month. Despite concerns about financial market volatility as Mexican government bonds tracked a spike in the U.S. 10-year Treasury yield, one member said the February rate cut "should not be interpreted as the end of monetary easing, since several indicators suggest that such easing is still insufficient."

Another member "pointed out that further monetary easing is still needed to support the economic recovery."

At the same time, a rise in February inflation to 3.8%, the highest in four months and toward the upper band of the central bank's tolerance band, is likely giving policy makers pause. The central bank's official target is for an inflation rate of 3%, with a percentage point tolerance range in either direction.

The peso was also buffeted when nerves over Turkey hit emerging markets earlier this week.

GROWTH OUTLOOK

However, the minutes showed all policy committee members expected "a transitory increase of headline inflation during the second quarter of the year." Headline and core inflation are anticipated to converge to 3% "within the time frame in which monetary policy operates."

Banxico revised up its 2021 growth forecast to 4.8% and its year-end inflation estimate to 3.6%.

Mexico-watchers on Wall Street are fairly evenly divided on the chances of another cut this time round.

The country's finance minister said this week the economy could expand more than 5% this year, highlighting reasons for potential caution within the central bank's policy-setting committee.

That prediction reflects in part an expected boost from faster growth in the United States as stronger fiscal stimulus and rapid vaccination rollouts. Still, expected growth will not make up for the 8.5% contraction in Latin America's second-largest economy in the pandemic-driven year of 2020, the worst slump in 90 years.

Mexico's economic trajectory, like that of other nations, will depend in part on the path of Covid, and vaccinations there have so far not risen to a significant level of the population.