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BBVA Note Banxico Turns Less Hawkish

MEXICO
  • Back in September, Banxico puzzlingly revised up its short-term headline inflation forecasts to 4.7% and 4.4% YoY for 4Q23 and 1Q24. As BBVA argued, with October’s headline inflation set to fall to levels slightly below 4.3%, Banxico was likely to revise down these forecasts, bringing its path closer to BBVA’s again.
  • There was a significant shift of tone in the statement that suggests that discussions to avoid a more restrictive stance in the coming months have started. Although it remained hawkish, there were several tweaks to the statement that shifted its tone to less hawkish.
  • In a nutshell, Banxico paved the way to start a rate cut cycle in 1Q24 if inflation continues to ease as expected. Considering that the recent rhetoric from Banxico and some members of the Board had recently turned more hawkish alongside the puzzling upward revision of its short-term inflation forecasts in September, today’s shift of tone was surprising, as evidenced by the USDMXN going up by c. 30 cents following the statement release. Not because it was not warranted, but because there were no signs that it could have happened today.
  • Today’s changes to the statement suggest that members thought it was appropriate to convey now that a start of a rate cut cycle in 1Q24 was becoming increasingly likely. BBVA continue to expect rate cuts to start in early 2024, and after today’s significant shift of tone of the forward guidance, BBVA no longer think that they need to push back further the timing of the start of the rate cut cycle, but at the same time, they now think that Banxico’s first moves could be more gradual.
  • Thus, BBVA continue to think that Banxico will end up bringing down the monetary policy rate to levels closer to their current below-consensus forecast (of 8.25%) by the end of next year, but BBVA have an upward bias.
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