Mexico and Brazil: Two diverging central banks

5 min

The end of last week saw Banxico and Banco Central do Brasil make contrary monetary policy moves. The Brazilian central bank cut its policy rate by 25bp to 6.75% while the Mexican rate was hiked by 25bps to 7.50%. 
In Brazil, it is the eleventh cut since the beginning of the easing cycle (October 2016) with the aim to support the recovery amid lower inflationary pressures. Inflation has sunk below the target (4.5% ± 1pp) and struggles to climb back; it stood at 2.9% in January. The central bank signaled a probable end of the easing cycle but intends to monitor the progress of structural reforms. In Mexico, the policy rate stands at a nine-year high. After reaching a sixteen-year high last December (+6.8%) inflation moderated to +5.5% in January. Yet it remains above target (+3% ± 1pp) and wages are accelerating as the slack in the labor market has faded. Banxico remains cautious as further volatility in the peso is expected in the context of NAFTA renegotiations and presidential elections in July.