Mexico: MPC sees conditions for further monetary easing, to ponder 50bps cuts
Metodi Tzanov
Helping finance professionals understand what is going on in Emerging and Frontier Markets
The Monetary Policy Council (MPC) agrees with the governor's narrative that we are in a new phase of the fight on inflation, given ongoing disinflation and a change of the inflationary risks, the latest sitting minute shows. The minute, published on Thursday, shows the board agreed that current challenges are consistent with a lower interest rate. Indeed, the board sees conditions for further monetary easing ahead and expects to ponder 50bps cuts again, taking into account the economy's weakness and the inflationary outlook. In any case, the board anticipates it will maintain its monetary policy in restrictive territory.
A member said there's been significant disinflation, with the challenge now being slowing inflation from its current position to the CB's 3.00% target. This member voted for a 50bps cut and says there are conditions to ponder a new similar cut in March. This member recognized there might be adversity in the context, clearly speaking about the uncertainty brought by US protectionism; however, this member said no one should dismiss the advances made on fighting inflation. We are confident this was the position of CB Governor Victoria Rodríguez.
A member highlighted CPI inflation slowed below 4.00% for the first time since 2021 and that GDP is expected to lose more momentum than anticipated in 2025. This member said the CB's cautious approach in 2024 avoided unwanted volatility but that the fight on inflation has entered a new stage. This member did not seem to commit to a new 50bps cut in March. We believe this was the comment of Deputy Governor Galia Borja.
A member echoed many of the comments we believe were made by Governor Rodríguez, while adding that the monetary policy, relative to the US, is likely to diverge, considering the US economy is showing resilience while Mexico is slowing, and considering the Mexican monetary policy is in clear restrictive territory, while it's closer to its neutral position in the US. This member backed a 50bps cut and said a similar cut may come in March; however, this doesn't mean 50bps cuts will continue to come ahead. We are confident this was the comment of recently appointed Deputy Governor José Gabriel Cuadra. It surprises us to see Cuadra so aligned with the narrative held by the more dovish board members.
One member wasn't as confident as the rest of the board about the success in fighting inflation, saying there are questions about the trend for core inflation and considering the economy's deceleration should not be at the center of monetary policy decisions. This board member said the MPC should be cautious and should try to cut mid-term inflation expectations. Indeed, this member said faster easing should not come until uncertainty cedes. This was clearly the comment of Deputy Governor Jonathan Heath, the only board member to vote for a 25bps cut in the latest sitting.
Finally, one member said recent volatility should not obscure the disinflation gains. This member graded these gains as notable and said the risks have changed, putting the fight on inflation in a new phase. We believe this was the comment of Deputy Governor Omar Mejía.
Overall, the minute comes without many surprises, showing a solid agreement in the board on a narrative presented by Governor Rodríguez in a recent interview, saying we are in a new phase on the fight to slow CPI inflation. Clearly, four members are on this side of the narrative, highlighting recent disinflation and a worsening growth outlook. This has its merits, indeed, however, we warn inflation has only fallen below 4.00% once in years, and did so in January because of a deceleration of agricultural prices driven by a base effect, while core inflation adds five months below 4.00% but way off from the CB's general inflation 3.00% target, showing resistance in December and January.