Banxico preview: Mexico’s monetary policy sailing into steady waters - HSBC

After a series of hikes to calm inflation, we now see a prolonged period of policy rate stability ahead from Banxico but timing of the start of the next easing cycle hard to pinpoint, according to Alexis Milo, Chief Economist at HSBC.

Key Quotes

“Banxico has entered more turbulent waters in recent quarters, as inflation has started to accelerate at a faster pace from H2 2016 onwards. In response, Banxico has steadily hiked the monetary policy rate to stabilize inflation expectations.”

“After its last meeting, Banxico sent strong signals that the tightening cycle had come to an end, delivering what appeared to be the last 25bp hike to the policy rate as it was raised to 7.00%. Also, communications since the decision reflected a more dovish tone, in our view, supported by the statement that the policy rate was already consistent with a convergence of inflation to its 3% target. So, the 400bp rate increases were a front-loading of monetary policy. In addition, inflation appears to be more contained and pressure from the Mexican peso is subsiding following recent appreciation.”

“Given this backdrop, we expect Banxico to maintain a similar tone in the upcoming meeting on 10 August, keeping the rate on hold at 7.00%. Indeed, Banxico has started to sail into calmer waters and the tide seems unlikely to change soon. We are not expecting additional hikes going forward, nor any cuts, at least in the short term.”

“The focus has shifted to the right timing to start the easing cycle. Rather than a strong view on the timing itself, we see three necessary conditions for Banxico to start cutting rates:

1. Additional appreciation and stabilization of the USD/MXN to between 17.00 and 17.50, which may not come before July 2018, as pre-election noise and the renegotiation of NAFTA could prompt episodes of volatility

2. A significant and continuous reduction in annual inflation that keeps inflation expectations solidly within the target for the coming years

3. The continuation of relatively subdued economic activity compared to its longterm trend, which may protract or intensify the negative output gap.”

“We think the start of the easing cycle is conditional on all these three developments, and do not expect it before mid-2018.”