On Thursday, the central bank of Mexico (Banxico) cut the key interest rate as expected by 50bps to 5%. Analysts at TD Securities, see two more 50bp cuts, followed by two 25bp cuts, bringing the rate to 3.50% by the end of the year.
“Banxico’s policy statement reads on the dovish side in terms of its changes from the May meeting. The growth outlook has been so impacted that Banxico stated that “greater economic slack is expected within the time frame in which monetary policy operates” and that the balance of risk for growth remains significantly biased to the downside. This implies a shift in view from the May meeting, which is logical give the large miss for recent economic data (from manufacturing, to trade, to retail sales), relative to already dour market expectations.”
“It appears as though Banxico’s forecasted inflation trajectory has been slightly reduced, while risks to the downside remain a larger than expected output gap as well as global disinflation. To the upside risks are MXN-related volatility, logistical supply-shocks, and costs related to sanitary measures implemented to combat the spread of Covid.”
“The outlook component of the statement remains relatively unchanged, which gives us confidence in maintaining our current policy rate forecast of two further 50bp cuts, followed by two 25bp cuts, that will bring the policy rate to 3.50% by end of year.”