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BBVA Now Anticipate Even More Gradual Easing Cycle

MEXICO
  • BBVA think that Banxico is likely to start to “fine-tune” the monetary policy stance and cut the policy rate by 25 bps to 11.0% in the first meeting of next year to avoid an unwarranted increase in the policy rate. Although they think that Banxico should not skip rate cuts at any meetings next year, its cautiousness, hawkishness, and recent hints suggest that consecutive rate cuts are unlikely at the start of the gradual easing cycle. Thus, although in BBVA’s baseline scenario a further delay in the start of the easing cycle is no longer necessary, they now anticipate an even more gradual easing cycle due to Banxico's cautiousness and expect Banxico to bring down the policy rate to 9.0% by year-end 2024.
  • While the Board has warned that rate cuts early next year won't necessarily mark the beginning of an easing cycle, BBVA suspect a further deceleration of core inflation will eventually convince them to signal the beginning of a normalization cycle sooner rather than later.
  • The ongoing improvement of inflation expectations will soon compel Banxico to transition to an active phase whereby the policy rate will require "fine-tuning" adjustments to avoid an overly restrictive monetary stance as measured by the real ex-ante policy rate.
  • BBVA expect core inflation to fall to levels close to 4.0% by late 2Q24 but to drop below that threshold until 3Q24. Yet, with inflation dropping back, the real ex-ante rate is not only set to remain very high but to most likely continue increasing in the coming months.
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