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BBVA Expect Banxico To Remain Hawkish & Backward Looking

MEXICO
  • Trend measures and BBVA’s expected path suggests that headline inflation is going to slow down more markedly than currently expected by Banxico through the end of this quarter. BBVA thus expect Banxico to fine tune its short-term headline inflation forecasts.
  • Despite a slight depreciation since its late-July lows, the peso has remained relatively strong in a context of increasing risk aversion over the past few weeks. Peso strengthening along with high real rates has brought monetary conditions to restrictive territory. BBVA continue to think that in the backdrop of falling inflation, Banxico should start a rate cut cycle in 4Q to avoid a further tightening of the monetary policy stance, even if the Fed ends up hiking rates one more time or is still holding rates steady.
  • Some hints about the roadmap for the rate cut cycle will be useful, but seem unlikely in the short term. Besides, there is a risk that with a strong economy and sticky services inflation, Banxico decides to remain backward looking and extend the very restrictive stance for longer.
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