Mexico | Will the recent peso depreciation prevent Banxico from delivering a rate cut?

Summary

Our base case is a split 3-2 vote in favor of a 25bp rate cut to 10.75% with a majority of members acknowledging a weakening economy and increased confidence about the inflation outlook, but the sudden peso depreciation following the weekend’s global volatility bout represents a risk to our call.

Key points

• Key points:
• Last week, the Fed kept unchanged its policy rate, but shifted its policy bias to neutral by hinting that it is increasingly focused on its maximum employment goal.
• Headline inflation in Mexico continued to trend upwards, but core inflation is set to have decreased for 18 months in a row despite core services inflation stickiness.
• We think that a rate cut is warranted given the continued deceleration of core inflation and increased downside risks to economic activity.
• The most recent exchange rate volatility is explained by a global risk-off mood and not by idiosyncratic factors; monetary policy should not react to these movements.
• Extending the pause would drive the policy stance to remain very restrictive during 2024-25, with an ex-ante real rate well above neutral.

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