Mexico | Banxico to extend pause as recovery takes shape

We expect Banxico to keep the policy rate unchanged at 6.50% this week. 3Q GDP and core inflation data for the first half of October challenged September’s dovish minutes, and weakened the case for further easing.

Key points

• Key points:
• Last week, the Fed voted in a split decision (10-2) to keep the fed funds target range unchanged at 3.75-4.00%, buying time to assess the policy path.
• In Mexico, recent data suggest activity is entering a recovery phase, but persistent output slack and a still-soft labor market point to limited demand-driven inflation.
• Recent inflation data suggest that the gradual moderation in core services inflation remains vulnerable to setbacks, reinforcing the case for Banxico to remain on hold.
• Domestic financial conditions remain orderly despite the peso’s depreciation amid expectations of further Fed rate hikes and a narrower policy-rate differential.
• We continue to think Banxico will look through a limited, preemptive Fed hiking cycle, given the divergence in domestic economic conditions.

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