MNI WATCH: Banxico Data Dependent But Reinforces Easing Bias
Mexico's central bank maintained its data dependent strategy.
Mexico's central bank stuck to its data dependent strategy in the decision to keep its overnight interbank interest rate at 11% Thursday, but its official communication suggested a dovish inclination to keep additional rate cuts on the table, especially with Deputy Governor Omar Mejía dissenting in favor of a 25 basis point rate cut.
The monetary authority stated that "the board foresees that the inflationary environment may allow for discussing reference rate adjustments" in the future. The dovish dissent might increase bets on a possible cut at the next meeting in August.
Last month, Banxico also kept its overnight interbank interest rate steady at 11%, saying the board could discuss "adjustments" in upcoming meetings, depending on the inflationary environment. In March, the central bank cut the rate by 25 basis points after seven meetings holding borrowing costs at 11.25%.
PESO DEPRECIATION
The deep depreciation of the Mexican peso since the general election on June 2nd, in which Claudia Sheinbaum won a sweeping victory as president, is a key reason markets had moved to predict a rate hold from Banxico, with only a few analysts betting on a cut.
On election day, the dollar was MXN 16.98 and is now around MXN 18.40, after peaking at MXN 18.76 on June 12th. The exchange rate drop reflects investors' concerns about constitutional changes with a two-thirds majority of the new president's allied parties in Congress.
"The disinflation process is expected to continue. Although the depreciation of the Mexican peso impacts the inflation forecast upwards, its effects are partly offset by those associated with the greater weakness exhibited by economic activity," the statement said.
Banxico said domestic financial markets have displayed "better behavior" recently. Additionally, "the U.S. Federal Reserve left the federal funds rate unchanged while some central banks of advanced economies lowered their reference rates. International financial markets registered limited movements."
HIGHER EXPECTATIONS
On the hawkish side, inflation expectations for headline inflation for the end of 2024 were revised upwards, while those for core inflation decreased slightly. Over longer horizons, forecasts remained relatively stable at levels above target.
The statement said annual headline inflation rose from 4.65% to 4.78% between April and the first fortnight of June 2024, due to an increase in the non-core component. On the other hand, core inflation, which better reflects the inflation trend, continued decreasing from 4.37% to 4.17% during the same period.
The board appears to be waiting for better data to create room to resume the easing cycle with more confidence. (See MNI INTERVIEW: Banxico Needs Better Data For More Cuts-Sanchez)