Mexico | Banxico is set to cut the policy rate by 50 bps on a divided vote

Summary

Despite core inflation breaching Banxico’s tolerance band, most Board members are likely to remain forward-looking, as weakening domestic demand is expected to continue weighing on consumption and therefore support a downward trend in services inflation.

Key points

• Key points:
• Last week, the Fed left its policy rate unchanged at a “well-positioned” 4.25–4.50% target range amid still-elevated uncertainty.
• In Mexico, while early 2Q activity data show signs of resilience, the labor market has weakened sharply and persistent headwinds weigh on the growth outlook.
• Headline inflation has surprised to the upside, but most of the increase reflects temporary factors affecting the non-core component.
• With a strong peso providing room for further easing, we expect a majority of the Board to stand firm on delivering further monetary policy normalization.
• We expect Banxico to deliver the well-telegraphed fourth consecutive 50bp rate cut, while beginning to signal a slower pace of easing going forward.

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