Mexican Peso: Banxico seen on hold with dovish risks – Commerzbank

Norman Liebke at Commerzbank expects Banxico to keep rates unchanged after roughly 300 bps of cuts last year and two more this year, as inflation remains slightly above the 3% target and prior easing has yet to fully filter through. He sees a high hurdle for further cuts, but notes that renewed disinflation could reopen easing and weigh on the Peso.

High bar for fresh Banxico cuts

"The Mexican central bank meets this evening at 8:00 p.m. Central European Time and will announce its interest-rate decision. Market-implied rate expectations suggest that market participants expect rates to remain on hold. A large majority of respondents to the Bloomberg survey also expect no change. Accordingly, the focus is likely to be less on the rate decision itself and more on Banxico’s outlook going forward. Deputy Governor Galia Borja recently said that inflation was moving back towards the 3% inflation target and that this was, overall, “a good sign”. "

"We therefore expect the hurdle for another rate cut to be high enough, given the easing already delivered and the geopolitical environment, for Banxico to hold steady for now. The recent uptick in inflation and the fact that the full impact of the previous rate cuts has yet to feed through also argue in favour of a wait-and-see approach. In addition, the peso’s recent depreciation could exert further upward pressure on inflation through higher import prices. "

"This does not necessarily mean that the rate-cutting cycle is over, however. If inflationary pressures ease more clearly again in the coming weeks and months, another rate cut could become more likely. This would likely weigh on the peso, as such a move is currently not priced in. Quite the opposite: one-year rate expectations currently imply two rate hikes of 25 basis points each."

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