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The Bank of Mexico's dilemma

February 11, 2020

Banco de México will have its monetary policy meeting this Thursday. The consensus expects a cut of 25 basis points. But that is not the most relevant. The novelty is that it will modify your communication strategy.

“The Press Releases on the Announcement of the Monetary Policy Decision and the text of the Minutes on this matter will be made clearer and more concise. This in order to contribute to better communication with the public… ”.

The foregoing is relevant considering that the Bank's communications are long and lately there has been a division within the Board that confuses analysts. Simpler language would be favorable for economic agents.

Banxico has lagged behind in its monetary policy, since if the cut of 25 basis points materializes at this week's meeting, the target rate would reach 7%.

The 1-day TIIE rate is higher than those paid in any other term. The 10-year rate pays 6.58%, which is the lowest return since the day Trump won the presidency and is also far from 9.22% days after the cancellation of the NAICM, where the perception of risk was high.

The 3-year rate is at 6.43%, a sign that the market expects more cuts going forward.

Specifically, the futures market discounts that the 1-day TIIE rate will reach 6% this year and 5.75% the next.

Core inflation remains in the range of 3.5-3.7%, while the average salary increases of insured persons in the IMSS are around 5-6%, which represents a risk for the evolution of inflation.

Aggressive cuts in interest rates can cast doubt on the Bank's credibility and its 3% target, as well as accentuate uncertainty.

On the other hand, the economy requires lower interest rates to reactivate.

In a recessionary economy: Should monetary policy remain tight to prevent cost pressures from tainting final prices? What are the costs in terms of public finances and private investment? How to adjust the interest rate to a recessive environment without losing credibility?

The new communication from the Bank will provide the market with more information on the monetary policy decision criteria of each of the five members of the Board, and thus better planning bases.

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