MXN: Further interest rate cut of 50 basis points likely – Commerzbank

Today, the Mexican central bank (Banxico) is widely expected to cut interest rates by a further 50 basis points to 8%. In a Bloomberg survey, only two economists predict a smaller cut of 25 basis points. This would mark the fourth consecutive 50-basis-point cut, bringing the total reduction since August last year to 300 basis points across eight steps, Commerzbank's FX analyst Michael Pfister notes.

Banxico may signal a slowdown in interest rate cuts

"The case for a rate cut is strengthened by the fact that the key interest rate would remain well within the restrictive range, and figures from the real economy could easily withstand further cuts. Although the PMIs have improved somewhat recently, the manufacturing sector index was still well below the neutral mark of 50 in May, for example. While base and seasonal effects may be cited as reasons for the exceptionally low retail sales figures published this week, these are likely to explain only part of the weakness. Added to this are the dovish comments recently made by policymakers, and the fact that trade talks with the US are progressing slowly. In short, we are also leaning towards forecasting a further interest rate cut of 50 basis points today."

"The upcoming meetings are likely to be particularly interesting. Core inflation has been higher in the last two months than in previous months, which is likely to worry policymakers. Therefore, it is possible that Banxico will signal a slowdown in interest rate cuts. The key interest rate is now nowhere near as restrictive as it was a few months ago, so slowing down to allow the effects of previous interest rate cuts to kick in might be appropriate."

"However, following today's anticipated 50-basis-point rate cut, the market is only anticipating a further 50 basis points over the next 12 months, which is likely insufficient given the issues in the real economy. Therefore, any hawkish signals today could fuel market expectations in the short term, but in the medium term, we currently consider further interest rate cuts to be more likely than the current market expectations. We therefore continue to expect USD/MXN to rise."