Mexico Holds Rate in Split Decision as Inflation Slows Down

Mexico’s central bank held its key interest rate for a second consecutive meeting, as policy makers wait to see if last month’s inflation slowdown consolidates before resuming their monetary easing cycle.

Banco de Mexico, led by Governor Alejandro Diaz de Leon, on Thursday voted 3-2 to maintain borrowing costs at 4.25%, despite inflation easing close to its 3% target. The hold was predicted by 19 of 23 economists surveyed by Bloomberg. The remaining four expected a quarter-point cut.

The bank voted to hold due to “uncertainty that surrounds” inflation forecasts, according to a statement posted on its website. “This pause provides the necessary room to confirm that the trajectory of inflation converges to the target,” the board said in the statement.

Mexico Holds Rate in Split Decision as Inflation Slows Down

The bank is facing both the worst economic contraction in nearly a century and resilient consumer prices. A month ago it paused a record cycle of 11-straight cuts, saying it needed time to assess inflation, which had sped past its target ceiling between August and October.

MEXICO PREVIEW: Central Bank Set to Keep Easing Cycle on Pause

Cost of living increases slowed in November to 3.3%, but many think the month was an outlier caused by an extended period of shopping discounts akin to Black Friday. Complicating matters further, inflation may also come under pressure from a 15% increase in the minimum wage announced for 2021.

Board Shakeup

The split vote raises questions about future decisions, with one of the board’s most hawkish members Javier Guzman retiring after this meeting. He is set to be replaced by Galia Borja, currently Treasurer in the Finance Ministry, whose views are little known.

It’s the first time in over a year that Banxico’s board has a 3-2 division. Last time was in November 2019, when the bank cut rates by a quarter point to 7.5%, with board members Gerardo Esquivel and Jonathan Heath arguing for a half-point cut.

Going forward, Banxico is likely “to keep rates on hold at 4.25%, but in this context it will be really important to know the stance of the next Banxico member,” said Pamela Diaz Loubet, an economist at BNP Paribas.

Given her background in the Finance Ministry, many analysts expect Borja to turn Esquivel and Heath’s dovish wing into a majority. “I believe she will tend to vote in the same line as Equivel, while she learns the business -- at least for the first decisions,” said Jessica Roldan, an economist at Finamex, noting that Borja and Esquivel have worked together in the past.

Deputy Governor Heath, the only member to vote for a cut in November, told Bloomberg News last month that December was likely the last chance to cut until the second quarter of next year, as he expects prices to climb at the start of 2021.

“We have Banxico on hold next year, but given the vote and the fact that a new dovish member will join the board in January, the risks are to the downside in the short run,” said Carlos Capistran, an economist at Bank of America. “Our view remains that core inflation above the target and domestic policy uncertainty will continue to limit Banxico’s room to cut.”

Mexico Holds Rate in Split Decision as Inflation Slows Down

Defending Autonomy

The pause to monetary easing has tempered Mexico’s main source of economic stimulus amid the ongoing coronavirus outbreak. President Andres Manuel Lopez Obrador rejected a large fiscal stimulus of the kind implemented by most of Mexico’s peers, arguing that lower debt will hasten a recovery.​ That left the central bank to do the heavy lifting in fighting the sharpest contraction since the Great Depression of the 1930s.

The central bank has now repeatedly brushed off Lopez Obrador’s call for lower rates to encourage borrowing. “Interest rates are still high,” Lopez Obrador said in October. “The Bank of Mexico is lowering them, but it has to go even lower for people to want to take out loans.”

Meanwhile, Banxico won a reprieve Tuesday on a congressional bill that might have forced it to buy dollars from dubious origins. After fierce opposition by the bank and the private sector, lawmakers decided to postpone a vote on the proposal so they could iron out the issues early next year.

The bank seemed to reference the bill in its statement, saying “it is imperative to safeguard the institutional framework.”

The comment “is unusual,” said Marco Oviedo, an economist at Barclays. “I have no recollection of a very autonomous central bank defending its autonomy in a monetary policy statement.”

©2020 Bloomberg L.P.

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