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The Bank of Mexico kept the key interest rate unchanged at 7.75% after today’s board meeting. According to analysts from TDS, the Mexican peso exchange rate and inflation expectations remain the key driver of monetary policy going forward.  

Key Quotes:  

“Banxico held at 7.75% and acknowledged that while growth dynamics are less robust, certain transitory shocks to non-core inflation have led them to slightly revise higher end-of-year inflation forecasts (though core is expected to remain on a downward trend).”

“We see the statement as more dovish on growth but slightly more hawkish on inflation given NAFTA uncertainty persists, in the face of transitory price shocks. MXN and inflation expectations remain the key drivers of policy going forward in our view.”

“All in all however, Banxico held its hawkish stance as it sees the bias of risks still tilted to the upside in an environment of high uncertainty.”

“We thus continue to see Banxico on hold and still believe that a 25bp cut to begin the easing cycle is possible, however thanks to the aforementioned transitory shocks this will be much more dependent on MXN performance and the evolution of inflation expectations over the coming months. Flattish performance in MXN (from here) can still be seen as consistent with easing in December, though we would need to see a decline in inflation expectations with medium and longer term expectations only now in a nascent stabilization, sitting around 3.6%-3.7% as of June. However, without further appreciation in MXN or a decline in inflation expectations by December, we’d likely push out our easing call to the new year.”