Mexico | Banxico is set to start cutting the policy rate

Summary

Banxico’s board had already signaled that a rate cut next week was likely. We think that is a done deal following this month’s inflation prints. We expect Banxico to cut the policy rate by 25 bps, to 11.00%. The focus will be on the signals about the upcoming rate-cut cycle.

Key points

• Key points:
• Banxico has held the policy rate steady at 11.25% for the past seven meetings since its last hike in late March 2023, but the policy has become more restrictive.
• In this period, headline inflation has decelerated by 2.4 pp, while 12-month headline inflation expectations have come down by 1 pp.
• The real ex-ante rate has risen to 7.4% since Banxico moved to the sidelines, and is now 4 pp above the upper limit of the staff’s estimated long-run neutral range.
• A 575 bp Mexico-US target rate spread partially explains why the Mexican peso has outperformed strongly since Banxico moved to the sidelines in mid May 2023.
• We continue to expect Banxico to cut the policy rate at each remaining meeting in 2024 to bring it down to 9.25% by year-end, and to 7.25% by the end of next year.

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