One Member Suggested A Possible Decoupling From Fed Relatively Soon

Banxico Minutes: Definite potential for dissenting vote(s) in September if the Fed were to hike by 75bps…

• One member mentions a possible decoupling from the Fed “relatively soon”:
• “He/she indicated that avoiding an excessively restrictive monetary policy would imply the possibility of decoupling from the pace of the Federal Reserve's interest rate hikes relatively soon. He/she expressed that this is feasible since:
  • The volatility-adjusted interest rate spread relative to the United States is one of the highest among emerging economies;
  • The Mexican peso stands out for its good performance and low volatility;
  • The Federal Reserve's policy stance is an important factor to consider, but Mexico’s monetary policy stance should rely more on the evolution of domestic variables and on the absolute policy stance;
  • Mexico started the hiking cycle earlier, and with a 75-basis point increase the policy stance would be situated in restrictive territory;
  • Unlike the United States, Mexico does not seem to face inflationary pressures from demand or the labor market; and
  • Inflation in Mexico is closer to its target than the United States and other countries. For said reasons, he/she stated that there is room for a less restrictive monetary policy than in other emerging countries.
• However, another member stated that “in view of the continuous deterioration of observed inflation and its expectations, during this hiking cycle it has been necessary to increase the pace of tightening two times. Even so, the ex-ante real interest rate remained in expansionary territory for almost a year, and after the last decision it finally reached a neutral stance.
  • He/she estimated that an increase of 75 basis points would allow to barely reach a restrictive level, so there should be no concern that the real interest rate is too high or harmful for economic activity. He/she highlighted that cyclical conditions become less important, until inflation is under control.”