Mexico | Banxico set to pause as it weighs inflation and growth risks

Summary

We expect Banxico to revise up its inflation forecasts. Besides, the forward guidance will likely remain unchanged, thus signaling that March would be too soon to resume the easing cycle.

Key points

• Key points:
• Last week, the Fed kept the target range for the fed funds rate unchanged at 3.50-3.75% amid strong economic growth and signs of stabilization in the labor market.
• In Mexico, GDP rebounded in 4Q amid strong external demand and resilient services, but the outlook for domestic demand continues to look uneven.
• As expected, inflation began to pick up in the first half of January, reflecting one-off fiscal-related price pressures that warrant a cautious pause in the easing cycle.
• Since the December meeting, financial markets have reflected peso strength and volatile yields; minutes showed ample support for a wait-and-see stance.
• We expect Banxico to leave the policy rate unchanged at 7.00% this week and to continue to stress downside risks to growth despite near-term inflation risks.

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