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On Thursday, the Bank of Mexico (Banxico) will announce its decision on monetary policy. On Wednesday, half-month inflation data showed the annual rate reached the highest level in almost two years. Analysts at the BBVA Research Department, consider the central bank stick to their call of a 25bp rate cut to 3.75%, but they warn the odds became closer, 60-40 leaning to a cut.  

Key Quotes:  

“A majority of analysts still expect the next movement of the monetary policy rate to be a rate cut to 3.75% this Thursday.”

“The MPC should not react to temporary increases of inflation, already acknowledged in its communication and expected by everyone (ie, markets and analysts)”

“The odds are possibly close and we think there is a 60% chance of a cut and a 40% probability of a hold. Following the recent changes within the MPC, with the appointment of Galia Borja, and the apparent implied shift in favor of the more dovish members of the MPC, it seems that the MPC will lean to another cut (that is why we think there is a higher-than 50% chance of a cut). However, Banxico has a history of backward-looking decisions, a tendency of being excessively cautious in our view, and to a degree, some disregard for the importance of clear communication as an important policy tool (that is why we think that the odds of the MPC holding the policy rate are not low, and close to 40% in our view.”