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MEXICO: BofA Expect 50bp Banxico Rate Cut In February

MEXICO
EM BulletMexicoBulletEmerging Market NewsNorth America
  • BofA now expects Banxico to cut by 50bp on Feb 6, instead of 25bp, due to falling headline inflation and weak economic activity. Headline inflation is now below 4.0%, inside Banxico's variability range, as is core inflation, opening the door for Banxico to accelerate the pace of cuts. They note it is a close call, and the risk is that Banxico only cuts 25bp. If US tariffs are enacted on Feb 1, then Banxico could even remain on hold.
  • BofA says that the real interest rate is higher than in episodes with core inflation below 4%. And the government is doing a significant fiscal consolidation, the economy remains weak and the labour market is softening. The most recent minutes point to three (of four) current board members open to the possibility of accelerating the pace of cuts.
  • However, even if Banxico indeed accelerates the pace, BofA still believes that it has limited room to cut and they maintain an 8.75% terminal rate forecast. The main reason is that core inflation is increasing and will likely soon be above 4%. Above target market inflation expectations, lack of Fed rate cuts this year and policy/tariff uncertainties are also constraints on Banxico. Ultimately, though, Banxico will not be able to cut rates significantly below 9.0% if core inflation does not converge to the target, in their view.
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  • BofA now expects Banxico to cut by 50bp on Feb 6, instead of 25bp, due to falling headline inflation and weak economic activity. Headline inflation is now below 4.0%, inside Banxico's variability range, as is core inflation, opening the door for Banxico to accelerate the pace of cuts. They note it is a close call, and the risk is that Banxico only cuts 25bp. If US tariffs are enacted on Feb 1, then Banxico could even remain on hold.
  • BofA says that the real interest rate is higher than in episodes with core inflation below 4%. And the government is doing a significant fiscal consolidation, the economy remains weak and the labour market is softening. The most recent minutes point to three (of four) current board members open to the possibility of accelerating the pace of cuts.
  • However, even if Banxico indeed accelerates the pace, BofA still believes that it has limited room to cut and they maintain an 8.75% terminal rate forecast. The main reason is that core inflation is increasing and will likely soon be above 4%. Above target market inflation expectations, lack of Fed rate cuts this year and policy/tariff uncertainties are also constraints on Banxico. Ultimately, though, Banxico will not be able to cut rates significantly below 9.0% if core inflation does not converge to the target, in their view.