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Banxico cut the policy rate 25bp to 4.25% at the September meeting in line with most analysts’ expectations and implied market pricing. The USD/MXN posted a mild recovery after the announcement but is now fighting to keep above the 22 level. Economists at Rabobank remain of the view that the policy rate will be cut below 4% in Q1 of next year and still expect to see USD/MXN trade above 23 in Q4.

Key quotes

“Banxico cut the policy rate 25bp to 4.25% at the September 24th meeting in line with most analysts’ expectations and implied market pricing. The decision was unanimous and the statement noted that room for manoeuvre is ‘narrow’.”

“CPI inflation is likely to be topping out this month and see the balance of risks as skewed to the downside heading into 2021. The output gap is key here and our estimates have it wider than the Bank is currently stating and we see significant risk that a slower demand rebound will only serve to exacerbate the output gap further thus alleviating pressure on prices in Q4 and into Q1.”

“We see the door as still open with room to ease and we expect the terminal rate will have a 3 handle rather than a 4 handle. While we agree with the potential positive price impact of MXN depreciation which we expect to see more of, we see little risk of MXN depreciating because of additional rate cuts given the relative attractiveness of Mexican rates compared to the rest of the LatAm region and much of the broader emerging market space. Indeed, we maintain the view that rates could be cut down to 3.50% and MXN would still be the most attractive carry currency globally when adjusting for volatility and liquidity. Furthermore, the departure of Javier Guzman next year leaves a more dovish tilt and we expect that will only be furthered by the choice of his replacement.”