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Analysts at the BBVA Research Department continue to expect the Bank of Mexico (Banxico) to lower its policy rate more than what markets are pricing, to 3.0% at the end of the easing cycle, now seen in the second quarter of next years. 

Key Quotes: 

“Recent inflation levels likely reinforce the shift towards more cautiousness and might even make at least one member vote for a pause.”

“The recent strengthening and outperformance of the Mexican Peso along with recent capital inflows should comfort Banxico.”

“Not only do real rates remain positive in a context in which negative rates are warranted, going forward, they would increase if Banxico does not cut nominal rates with easing inflation, unnecessarily reverting some of the monetary policy easing. We do not think that will be the case. In spite of the current change in relative prices, there will not be any demand-side pressures in the coming quarters, giving Banxico room to further cut rates.”

“We continue to expect that Banxico will slash rates much further than currently expected, until they are around 0% in real terms, but we now expect Banxico to slow the rate cut cycle (to 3.75% by year-end). We continue to think that the policy rate will reach 3.0%.”