EC Mexico: It’s Too Soon For A Dovish Shift At Banxico

MEXICO: This week’s monetary policy meeting will be the first with the two newly-appointed board members. Investors would like to see signs of policy continuity, while any significant dovish departure would be a risk to monitor. Attractive rates, a solid macro stance and a more dovish FOMC suggest, meanwhile, a benign near-term bias for local assets.

Banxico has been a chief anchor of market stability

Mexico’s central bank (Banxico) has played a critical and ultimately successful role in the stabilization of Mexico’s local markets in recent years, when policymakers have faced several major shocks that resulted in sharp depreciation and heightened volatility in local assets. 

These included the collapse in oil prices at the end of 2014, the election of Donald Trump in 2016, the NAFTA treaty renegotiation and, finally, the election of Lopez Obrador. 

Banxico’s success, evident in the superior central bank credibility achieved through pro-active monetary policy decisions, is a critical legacy inherited by the Lopez Obrador administration. It is also, perhaps, the last remaining critical element of the policymaking apparatus that investors should monitor, to try to understand the extent to which policy preferences of the new administration will shape overall policy directives.  

The first meeting of the new regime

Mexico’s monetary policy committee meets again this Thursday and there’s a broad consensus that bank officials will keep the policy rate stable, at 8.25%. 

We also expect policy guidance to remain relatively hawkish, even if the board should display a much-reduced appetite for further rate hikes, effectively moving the policy guidance closer to a “neutral” bias. 

Several considerations could justify a less hawkish bias to the bank’s policy guidance. Chief among them is the recent dovish surprise by the US FOMC, which, in practice, should be seen as a near-term improvement in the risk profile for the Mexican peso. 

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