MXN: Dovish Banxico and depreciation outlook – Commerzbank

Commerzbank’s Michael Pfister and Norman Liebke note that Mexico’s latest inflation data and Banxico minutes support a dovish stance. With only minimal forecast revisions and no immediate need to react to the Iran war shock, they expect further rate cuts if energy pressures stay contained and project that the Mexican Peso will weaken over coming months.

Soft inflation response and weaker peso

"Overall, the meeting minutes confirm Banxico’s recent, rather dovish decision to cut interest rates again. This has only reinforced our general assessment that Banxico is leaning toward a dovish stance and could deliver further rate cuts this year."

"Accordingly, at least for now, there is no cause for panic for the Mexican central bank (Banxico), as was recently confirmed in its meeting minutes. Nor do central bankers see any reason to deviate from their current interest rate policy in the coming months due to the war in Iran."

"Furthermore, they also confirmed that the fiscal measures implemented at the beginning of the year are unlikely to have any further second-round effects on inflation. Accordingly, inflation forecasts were revised upward only minimally."

"Only if energy prices were to remain at current levels for an extended period and energy inflation were to seep into the components of core inflation would the Mexican central bank be justified in raising rates. However, we are currently still far from that scenario and do not anticipate it in our base case."

"We therefore continue to expect the Mexican peso to depreciate over the coming months."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)