Mexico: Three board members suggest monetary easing may come soon in minute

• Deputy Governor Borja, the kingmaker, assumed a dovish position that could still change if CPI inflation continues to disappoint, in our view
• Heath and Espinosa take the hawkish side of the board, say there are no conditions for any easing
• No board member voted against what seems to us as dovish forward guidance

The June 27 CB sitting minute confirms three board members are willing to cut the Monetary Policy Rate (MPR), in our view. Deputy Governor Omar Mejía voted for a rate cut, while Governor Victoria Rodríguez and Deputy Governor Galia Borja suggested a cut may come ahead, per our read of the minute.

We find it relevant to note no Monetary Policy Council (MPC) member voted against the dovish forward guidance presented in the decision statement, claiming there will be conditions in coming sittings to discuss a rate cut. This may not be too surprising considering the forward guidance was not committed, only seeing conditions "to discuss" any easing. However, it wouldn't have surprised us if the more hawkish board members voted for a more neutral forward guidance.

Deputy Governor Omar Mejía, the only one voting for a 25bps cut, said the economy is under opposing pressures: currency depreciation and slowing economic activity. By claiming the worrying currency depreciation seen in early June, following the June 2 election, is offset by a weaker growth outlook, and by noting the recent acceleration of CPI inflation was driven by non-core prices, Mejía sustained the inflationary outlook had not changed by the time of the sitting, allowing for a rate cut.

We believe Mejía warned of the risk of further currency depreciation among the upward risks on inflation but said monetary policy should only react to the currency as it pressures inflation. We read it was Mejía who said the policy decisions should not only depend on available data, as it risks conducting the monetary policy with a delay.

All board members recognized core disinflation on the back of goods; however, all of them warned there is no clear downward trend for service prices. Some said service prices remain pressured by costs.

A board member said the disinflation process continues to find obstacles, with the currency depreciation being the latest. This board member called the MPC to remain cautious and warned growth may not be slowing too much, supported by private consumption and investment, and public spending. This board member said the CB's communication must highlight caution and data dependency.

Another member agreed the inflation outlook has changed little but agreed with Mejía about the diverging effects of currency depreciation and of slowing economic activity. This board member said this policy decision was being taken in a context of uncertainty, even though the monetary policy remains unquestionably restrictive. Moving forward, this member said there are conditions to resume the easing cycle. We believe this comment was made by Deputy Governor Galia Borja, who we see as the kingmaker heading to the August sitting.

A member, maybe Governor Victoria Rodríguez, echoed the claim that the main two pressures observed at the time of the sitting diverge: currency depreciation and slowing economic activity. She said core CPI inflation maintained a downward path and that the inflationary outlook overall has improved from 2022 and 2023. This member said this allows the CB to ponder rate cuts in the coming sittings.

Two board members, surely Deputy Governor Jonathan Heath and Deputy Governor Irene Espinosa, took a more hawkish position. Probably Heath said the MPR cannot be cut until inflation and, particularly service prices, show a downward trend that looks to converge to the 3.00% year-end target, and added some fine tuning could come up later, to keep the ex-ante policy rate at about 7.0 to 7.5%. In turn, it was probably Espinosa who said the inflationary outlook remains adverse and that a rate cut could generate further FX volatility and push up mid-term inflation expectations, while calling to highlight the need for caution and data dependency in the CB's decision statement.

Overall, the minute confirms Deputy Governor Galia Borja is looking to join dovish Mejía and Governor Rodríguez in voting for a 25bps cut in the upcoming August sitting. This is unsurprising considering she spoke in favor of a cut in May, but decided to hold the policy rate 11.00% in June because of the FX volatility recorded after the June 2 general election. Having said this, Deputy Governor Borja could still change her mind if CPI inflation continues to disappoint in July, as it did in June, voting once again for policy stability that extends the easing cycle's ongoing pause.