The Bank of Mexico cut the key interest rate on Thursday to 4%. A dovish Banxico leaves the door open for additional cuts even after acknowledging that headline inflation is set to temporarily rise in the near-term, explained analysts at BBVA Research.
Key Quotes:
“Banxico resumes its easing cycle with a 25 bp rate cut, to 4.00%, after “pausing” it in the previous two meetings. Most analysts, including us, expected the cut. The focus, in a backdrop of a headline inflation set to increase, was going to be on the voting within the Board, the wording of the statement, and the forward-guidance –if any. All three elements suggest that additional rate cuts in the coming meetings are likely.”
“Given the dovish shift, the temporary nature of the jump in inflation in the months ahead, and with the economy likely to weaken further by the time of the next meeting, the odds of a second consecutive rate cut in March have increased. Lower inflation together with the need of more stimulus in a backdrop of a more dovish Board supports our view that Banxico will take the policy rate down to 3.5% this year. We think that after today, the odds of the rate reaching 3.5% by May have increased.”
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