Mexico: We expect Banxico to cut interest rates two times this year – BBVA

The central bank of Mexico (Banxico) has enough reasons to begin to soften its wording on inflation as soon as in next month’s statement, according to analysts at BBVA. They expect a dovish shift on the growth picture deterioration, slowing inflation pressures and a more dovish Fed.  

Key Quotes:  

“We now expect the easing cycle to begin in August, we do not rule out an earlier start.”  

“Is it still too soon for a dovish shift? We think that there are enough reasons for Banxico to begin to soften its wording on inflation as soon as in next month’s statement (March 28). We expect the Board to acknowledge that even if inflation risks are still skewed to the upside, the balance of risks has markedly improved, and with a steeper economic deceleration than previously thought, risks to the upside and downside seem more balanced now.”  

“We now think Banxico will start easing its policy rate in August and we now anticipate two 25bp rate cuts this year (in August and November). We continue to expect 100bp of rate cuts next year, i.e 6.75% by December 2020. We think that Banxico has enough reasons to acknowledge that inflation is on a downward trend and risks have eased. In a context of a negative output gap, demand-side pressures will remain absent. With pledges from the Fed to be patient with its hiking cycle, the probable need to keep a wide interest rate spread is no longer there.”

“The current stance of monetary policy has become more restrictive than appropriate. Therefore, we now expect the easing cycle to begin in August and we do not rule out that it could even begin earlier, in June. Thus, we do not rule out three rate cuts this year.”