Mexico: Banxico holds rates unchanged

The decision might not mark the end of the rate cut cycle if with falling inflation Banxico resumes it in 2021. Banxico reasons for pausing not clear in the statement.

Key points

• Banxico continues to expect inflation to converge to 3.0% but once again opted to be backward and not forward-looking
• It is surprising that they have decided not to procure further easing in financial conditions in the context of the largest economic contraction in at least 100 years
• In a shift from the previous two statements, the Board seems now to be more concerned about the recent, temporary in nature, inflation rise than the economic outlook
• With inflation gradually easing, a weak economy and a strong Peso, the case for further easing will become stronger in 2021; yet, with an overly hawkish central bank we should only expect that the door would open for one or two additional rate cuts
• We now expect Banxico to remain on the sidelines in December; future movements will only be possible if inflation eases towards 3.0-3.5%. With today´s pause, Banxico clearly signals that the real policy rate will remain above 0.0%, contrary to our expectation of 0.0% or slightly negative in the future

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