The recently released minutes of the March central bank meeting – in which the policy rate was held steady at 8.25% – show that a majority of board members believe core inflation remains a concern (it is stuck at +3.6%). The balance of risks for inflation appears tilted to the upside. Under the current environment of uncertainty, Banxico will follow: (i) the potential pass-through of exchange rate fluctuations to prices, (ii) Mexico’s monetary policy stance relative to that of the US and (iii) domestic slack conditions. The latter two developments are positive for inflation, with slightly higher unemployment (+0.2pp to +3.5% in the last three months). Yet the risk of exchange rate volatility from AMLO’s policy fluctuations remains: On April 16 he ordered ministers to ignore his predecessor’s education reform, bypassing its constitutional validity. There is also potential volatility due to trade and migration policy in the US and Pemex’s financial situation. Hence, we do not see an interest rate cut on the agenda until the fall.
