Fixed Income Analysis /

Mexico: Four board members favor further monetary tightening in minute

    24 November 2022
    • Board's arguments are rather homogeneous, in our view
    • Board is carefully watching core inflation and mid-term inflationary expectations
    • Board is clearly unwilling to decouple from the Fed in the immediate term
    • Most board members fail to discuss when an easing cycle may begin

    Four of the five members of the Monetary Policy Council (MPC) said to favor further monetary tightening in the November 10 minute, published by Banxico on Thursday. Only deputy governor Gerardo Esquivel didn't show commitment to further tightening. We remind Esquivel broke the CB's unanimity, voting for a 50bps increase of the Monetary Policy Rate (MPR), while the rest of the board favored a 75bps hike, matching the Federal Reserve's tightening.

    Deputy governor Gerardo Esquivel said the slowing the tightening would show the terminal rate will be soon reached; although, he recognized slowing the tightening doesn't mean the cycle would have to end right away, with the CB being able to extend it. He argued the currency's recent appreciation allows to move away from the Fed's pace. Esquivel claimed a higher interest rate risks raising risk premiums as it weakens the growth and employment outlook.

    One member said the monetary policy outlook is complicated by high core CPI inflation, with inflation failing to show a tipping point. The CB must communicate further tightening is coming, this member said, claiming Banxico's message must be clear to prevent inflationary expectations from losing their anchor. This member says no easing can come until inflationary expectations hover 3.0%.

    A member said the inflationary pressures are generalized, deep, and persistent, demanding a restrictive position by the CB, calling for a 75bps hike to assure the MPR stands in such restrictive ground. This member said further monetary tightening is needed and highlighted the relevance of looking at the Federal Reserve's decisions when making its own, even if it shouldn't follow them mechanically.

    A member said the aggressive tightening should continue amid high and accelerating core inflation and a deterioration of inflationary expectations, among other factors. Slowing the cycle should only be considered when the core inflation outlook improves, the member diverged from arguments Esquivel has presented to lock on a lower-than-expected terminal rate, saying current decisions shouldn't be determined by the monetary policy history, considering the current outlook is particularly complex. This member added the gap with the US' interest rate should be kept at least at 600bps; thus, this hawkish member said, the Fed's movements give the minimum adjustment the CB should make. Decoupling will be possible when the inflationary dynamics diverge in the US and Mexico, and the Fed's terminal rate is known. Looking forward, this member said further tightening is needed, the tightening may slow, and no easing cycle should start quickly and should only do so when there is a clear decline of inflationary risks.

    Finally, one member said the tightening must continue amid high inflation and loosely anchored expectations. This member said a 75bps hike prevents current inflation from affecting the price-forming process down the road. This member said the synchronization with the Fed is conditional to the shocks faced in each country. This member seemed to face further tightening but said the CB should not guide towards a specific terminal rate, needing wiggle room and believing the cycle should only end when inflationary pressure cedes.

    Overall, the minute strengthens our expectation that the CB will raise its policy rate by 50bps in December and by 25bps in February; we expect both decisions to come from a divided board, with deputy governor Esquivel remaining the lone dovish divergent. Another 25bps hike in March will probably be determined by the Fed's actions and the pace of core inflation until then, in our view. This suggests the terminal rate will be at 10.75 or 11.00%. We expect the CB to start its easing cycle in H2 2023, perhaps even before the Fed does so. However, this will depend on mid-term inflationary expectations, in our view.