Mexico: Muted Policy Reaction To Recession

Wage increases seen throughout 2019 already suggested that an upward momentum was underway (see chart above). Strong wage gains would be consistent with the fact that the local job market remains around full-employment, ending 2019 near 3.4% (SA 3m-MA). But the fact that that upswing also coincided with last year’s 16% increase in the minimum wage may have been an additional factor strengthening workers’ wage increase demands. 

Treading softly to avert FX volatility

Overall, wage pressure risks should remain a persuasive near-term argument for central bank officials to maintain a cautious monetary policy guidance, despite the rising slack in economic activity. That guidance should not prevent the board from gradually reducing the policy rate towards 6.5% by 2Q. 

Market consensus is that the bank should pause after that. Our view is that Banxico should extend the easing cycle a bit further, towards 6%, but that remains a low-conviction call and highly dependent on FX and GDP dynamics in the coming months. Mexico’s robust labor market indicators and the focus on FX stability by both the administration and the central bank, also suggests that, despite the dovish dissentions seen in recent central bank decisions, policymakers should be under little pressure to ease more forcefully.  

The change in the board’s composition expected for December may also figure in the board’s voting pattern this year. In particular, expectations that the new appointment may alter materially the policy inclinations of the median-vote at the board may increase the likelihood of a shorter easing cycle in 2020, followed by a deeper cycle next year.

The MXN's outperformance could last longer

Banxico’s resistance to follow the lead of other central banks in the region and embark on a deeper monetary easing cycle should continue to support the MXN throughout 2020. But the peso’s outperformance is also justified by the significant improvement in Mexico’s external accounts seen in recent quarters.

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The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument.  more

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