Mexico: Banxico’s Minutes – Limits to Patience

Mexico: Banxico’s Minutes – Limits to Patience

Nader Nazmi - Market Economics
Latam Macro Snapshot | 09 Nov 2012 16:45 |

Worried about inflation for now.

According to the minutes from the 26 October meeting of the Monetary Policy Committee (MPC), the board sees elevated risks to inflation near term. While it judges supply shocks as the main cause of high inflation, it is mindful of second-round effects. It is worried that price pressures, albeit temporary, will contaminate inflation expectations, result in wage hikes that exceed the inflation target and spill over to core inflation. This is especially a concern given that the output gap has closed (and is likely positive) and inflation has been stuck above the 4.0% Banxico implicit tolerance ceiling for five months.

The key, new point made by the minutes is that if inflation remains high for much longer, the bank will hike pre-emptively. It will not wait for a confirmation of second-round effects or of contamination of expectations to increase the policy rate.

However, most board members see high inflation as temporary. They say that the uptrend in core inflation likely ended in August, and headline inflation likely peaked in September. The October CPI data, released yesterday, support this view.

The board sees deterioration in the balance of risks to growth, due to global factors. Most board members see weaker growth momentum in Mexico, due to weaker external demand. Manufacturing exports, as well as components of domestic demand, are showing the adverse impact of external conditions, keeping the output gap close to zero.

In summary, the pause continues for now. If inflation shocks persist (the MPC expects them to fade) and the inflation trend does not reverse (the MPC believes it reversed in September), then Banxico will increase its policy rate to keep inflation expectations anchored. We do not expect a rate increase until October 2013, while the consensus is looking for the first rate hike in 2014.