Banxico decided to keep the interest rate unchanged under a unanimous vote. However, members continue discussing different scenarios to an eventual policy reaction to a first hike by the Fed.
The board acknowledges that it is facing a dilemma. On one hand, the domestic economy remains weak, under conditions of slack and inflation below target. On the other hand, the external financial environment faces a complex global context with different sources of uncertainty that could affect domestic markets and FX, contaminating inflation and inflation expectations.
Hiking before the Fed is still on the table, although it could happen under special circumstances, and likely not in a pre-emptive manner. One member said that hiking before the Fed could be advisable if the markets start to expect an imminent hike in the US and Banxico should react. Another member supported the idea, but only if markets anticipate a Fed move and this reaction sets inflation or the stability of financial markets at risk. Accordingly, the majority of board members considered that in the absence of upward changes in inflation expectations, hiking before the Fed would imply more costs than benefits.
Barclays notes as folows "The minutes confirm our view that Banxico has enough space to make a proper move. As inflation is currently below target, and inflation expectations are stable, the board needs to have enough certainty that first, the US Fed will hike (or has already hiked) and second, that inflation and inflation expectations will be affected by this move. In our view, only a strong reaction in the local curves (not even in the MXN) should motivate the central bank to move before or in an extraordinary meeting after it is known that the Fed will hike. Accordingly, we maintain our call that, conditional on the Fed moving in September, Banxico will not hike until October. Finally, the hiking cycle will be as large as the one implemented in the United States."
