Mexico | Banxico’s warranted cut will move policy into neutral range

Summary

We think the room to continue easing is unlikely to have been materially affected by the Fed’s more cautious tone from last week, as some Board members have indicated that a narrowing rate spread is not a binding constraint.

Key points

• Key points:
• Last week, the Fed lowered the fed funds rate target range to 3.75-4.00% and warned that a third consecutive rate cut in December was not a “foregone conclusion.”
• Mexico’s economy contracted in Q3, as the temporary boost from net exports in the previous quarter faded and domestic demand remained in contraction.
• Headline inflation remained within Banxico’s target range in early October, as soft core goods prices and subdued non-core inflation offset still-sticky services prices.
• Supportive financial conditions continue to suggest the environment remains conducive to further easing, underpinning the Board’s confidence in its easing approach.
• We expect Banxico to deliver another 25bp rate cut this week to 7.25%; as monetary policy moves to neutral, attention will turn to any signals of a less dovish tone.

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