MNI BANXICO WATCH: No Hint Of More Easing After Standing Pat

Mexico's central bank decided unanimously to maintain its overnight interbank interest rate at 11% Thursday after a 25 basis points cut in March, a decision in line with market expectations that provided little hint of a possible resumption of easing.

Banxico said in its statement that the board might discuss "adjustments" in the next meetings depending on the inflationary environment.

"The Board will thoroughly monitor inflationary pressures as well as all factors that have an incidence on the foreseen path for inflation and its expectations. Looking ahead, it will assess the inflationary environment to discuss reference rate adjustments," the statement said.

"It will also consider the incidence of both the restrictive policy stance that has been maintained and that prevailing in the future on inflation throughout the horizon in which monetary policy operates," added the board. (See MNI INTERVIEW: Banxico Should Have Begun Easing In '23-Werner)

Central bank policymakers highlighted that since the last monetary policy meeting in March, medium and long-term government bond yields have increased. "The Mexican peso underwent episodes of volatility. The weak behavior of economic activity during the last quarter of 2023 is anticipated to have extended into the first quarter of 2024." Also, the labor market remained strong, according to the statement.

HIGHER INFLATION

The board emphasized that annual headline inflation rose from 4.40% to 4.65% between February and April as a result of an increase in the non-core component.

"Core inflation, which better reflects the inflation trend, continued decreasing during the same period, from 4.64 to 4.37%. Expectations for headline and core inflation for the end of 2024 adjusted upwards. Those for longer terms remained relatively stable at levels above the target," Banxico said.

In recent weeks, several board members have adopted a cautious tone about monetary policy, leading market participants to bet that Banxico would keep borrowing costs unchanged.

Furthermore, the decision shows an increase in Banxico's official forecasts for inflation, now expected to converge to the 3% target only in the fourth quarter of 2025, compared with the second quarter as of March.

The minutes of the meeting, which will be released on May 23rd, will shed light on the board's discussions and might offer more clues about further steps.