Olivia Álvarez (Monex Europe) | The last policy meeting by Banxico in 2020 is set to capture broad attention, as several topics alongside the monetary policy agenda will be on the table. In addition to a debated interest rate cut, Banxico will be faced with concerns over the recently approved Senate bill on excess dollars, dollar auctions from Fed swap lines, and the departure of one of the board directors.
All of these factors have the potential to influence market sentiment, and therefore the peso. Crucially, stagnation on the US bipartisan talks on fiscal stimulus and uncertainty about vaccination domestic plans underlie on the currency weakness, but Banxico´s meeting next week will guide the path looking ahead.
In the last policy decision, Banxico halted the easing cycle undertaken since mid-2019, which accelerated after the pandemic outbreak. Over this period, Banxico cut 400 basis points from the overnight interest rate, which finally landed at the 4.25%. The pause came alongside high uncertainty around the inflation outlook, with the central bank standing by its rather conservative policy stance. Inflation data has recently shown signs of strong downward pressures, with the headline figure falling to 3.33% in November, from 4.09% in October, fundamentally driven by downward core inflation.
The data pose questions regarding whether the Bank would resume the easing cycle, but even Jonathan Heath, who dissented on the pause earlier, mentioned that any further cut would be more appropriate by Q2. Market-based expectations and broad analyst consensus do not predict a rate cut for the upcoming meeting either, but Banxico´s assessment on future inflation dynamics will be determinant in fine-tuning forward guidance looking ahead. The event will also serve as a farewell to director Javier Guzman, who is meant to be replaced by former Treasury director Galia Borja. Although Borja´s stance on monetary policy is still unknown, she might tilt the board to a more neutral/dovish balance after one of the most hawkish members is gone.
A far more pressing concern in Banxico´s agenda is to do with the Senate-approved bill forcing Banxico to buy excess dollars from banks, which are banned from returning them to the financial system on the base of regulatory issues. The bill ultimately exposes the central bank to money laundering risks, rising prospects for future sanctions from regulatory institutions and weighing on Banxico´s autonomy and credibility. Governor Alejandro Días de León said that the bill does not incorporate Banxico´s concerns on the proposed mechanism, while remarking that the Bank will continue talks with the lower house in order to prevent the bill from going forward and weakening Banxico´s mandate. On an apparently unrelated line, Banxico announced two additional auctions of Fed line swaps funds to avoid any potential stress stemming from year-end funding effects.