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On Thursday, the Bank of Mexico (Banxico) will have its policy meeting with new members on its board. On Tuesday, inflation data from January came in above expectations. Analysts from TD Securities forecast only slightly changed inflation dynamics which combined with other forward-looking factors, continues to support their call for two additional consecutive 25bp rate cuts, beginning this week. 

Key Quotes: 

“With recent data in hand, we view the case for extreme caution from Banxico in pursuing further easing as having weakened since the November hold. This risk bias is enhanced by the increase in dissents for further easing at the December meeting, as well as the 2021 addition of President Lopez-Obrador’s newly appointed Deputy Governor, Galia Borja, to replace the hawkish and outgoing Javier Guzman.”

“Inflation expectations are sending interesting signals to Banxico, as the decline in inflation expectations over the past three months has been notable, particularly medium term expectations. Medium term expectations (1 to 4 years) now sit at the lowest level since before the 2016 U.S. election that drove substantial MXN
weakness. This is likely reflective of weakness in core service prices and the effect of a large and sustained output gap, which is now dominating the fading Covid price shock.”

“Easing sooner to provide economic support will allow the central bank more time to operate with lower rates before an eventual U.S. rate normalization which may force Banxico to follow suite, regardless of it being warranted by the domestic economy or not. A solid MXN rebound following strong USD upside pressure over the second half January should also allay Banxico fears. There isn’t substantial scope for easing however, and we only foresee two 25bp cuts (though there could be a bias for more), but acting sooner rather than later remains more logical in our view.”