Mexico | Banxico delivers surprise cut, signals prolonged pause

In a split 3-2 decision, Banxico unexpectedly cut its policy rate by 25 bps to 6.25%. The upcoming minutes may shed light on Banxico’s perceived macroeconomic benefits of this unexpected 25bp adjustment.

Key points

• Key points:
• The wording of the policy statement now explicitly states the Board’s expectation of holding the newly “attained” 6.25% rate unchanged “for an extended period.”
• In the Board’s view, one-off adjustment would support inflation convergence and help address external macroeconomic challenges.
• Banxico’s confidence in the ongoing disinflation process appears stronger than recent inflation data and its own updated forecasts would suggest.
• Given the considerable uncertainty surrounding the neutral real interest rate, it is difficult to establish why 6.25% is materially more appropriate than 6.50%.
• Although the current ER level is close to our fair value estimates, risks are now tilted toward further peso weakness rather than a recovery after the recent overshooting.

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