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Deutsche Bank Continue To See Space For Policy Normalisation, Beginning March

MEXICO
  • Headline inflation has followed the expected uptick from its October trough, but Banxico can look through these pressures, in Deutsche Bank’s view, as annual core inflation remains on a declining trend. They continue to see space for policy normalisation and remain of the view that an easing cycle will likely start in March 2024, with Banxico softening the forward guidance in the February COPOM. They pencil in the policy rate ending this year at 8.75%.
  • Deutsche Bank note that the November IGAE may have contributed to bring the economy back to trend, signalling subsiding demand pressures. They believe that the tight monetary stance has made enough inroads to afford Banxico the degrees of freedom to start pondering more heavily the downside of keeping the policy rate at its current level, namely, the fiscal cost and an overvalued currency.
  • The precedent set by previous cutting cycles suggests that headline and core inflation are within the ranges observed at the outset of easing episodes. 12m inflation expectations are at the ceiling of the range observed in previous cycles. Banxico has also initiated easing cycles when the economy may have displayed output gaps similar to the level DB currently estimate.
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