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On Thursday, the Governing Council of the Bank of Mexico will meet. A 50bps rate cut is expected. According to the Research Department at BBVA, Banxico will likely continue more focused on the exchange rate (ER) and capital flows than on inflation and economic activity, but concerns should have eased in the intermeeting period.

Key Quotes: 

“In our view, there is further room for rate cuts with easing ER (exchange rate) and capital flows risks, along with the absence of demand-related inflation risks and a deep fall in economic activity.”

“ER and capital flows movements will remain driven in the near future by global risk-aversion/appetite and not by interest rate differentials.” 

“A looser monetary policy stance would not weigh significantly on the ER (exchange rate) and capital flows in the short-term as global sentiment will continue to have much more to do with the ER and capital flows than Banxico’s policy rate.”

“This clearly signals that Banxico will remain cautious and will continue to implement hawkish cuts in the next meetings”.

“Yet, we continue to expect Banxico to cut the policy rate until it reaches c. 0% real levels by yearend ie, 3.0% to 3.5%.”