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BBVA Say Next Move Not Around The Corner But Will Be A Cut

MEXICO
  • In a backdrop of a less hawkish Fed, easing inflation, a strong peso, and market and consensus expectations of a pause, BBVA expect Banxico to hold the policy rate steady at 11.25% and signal that it will most likely move to the sidelines. With inflation easing towards 4.5% by year end, BBVA now have a strong bias that Banxico might start to cut rates in Q4 and considering the overly tight monetary stance, they think it should.
  • BBVA highlight that after the Fed's most recent move, the spread between the policy rate in Mexico and the fed funds rate fell back to 600 bp (from 625 bp following Banxico’s surprising 50 bp hike in Feb), a much higher level than the c. 450 bp average observed in the last 15 years.
  • The Mexican peso has strengthened further over the past two weeks even as expectations of a pause built up (i.e., despite projections of some narrowing in the interest rate spread) following better-than-expected inflation data, the discussion within last meeting’s Minutes in which at least two members felt that peak rates had already been reached, and comments from two members of the Board, the Governor being one of them, strongly signaling that they were ready to vote for a pause at this upcoming meeting.
  • BBVA think that Banxico will revise down its 2023 headline inflation path to bring it closer to their forecasts and also believe that it might fine-tune its short-term core inflation forecasts.
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