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Deutsche Bank Says Door For Rate Reductions Should Only Open in Q4

  • Overall, while headline inflation seems to have peaked and the monthly data does show a decline in annual core inflation, it seems to us that the risks of a very slow convergence of inflation towards the central bank target are significant. And the inflation data of the services sector is also an indicative of relatively persistent pressures that should be taken seriously by Banxico if it is to guarantee the convergence of inflation to its 3% target over the next 2 years.
  • Under the current conditions, Deutsche Bank expect Banxico to continue to follow the Fed at least while the US central bank continues to hike the Fed Funds Rate.
  • They expect that Banxico will increase the overnight rate by 25bp when it meets this week and again in March. This will bring the policy rate to 11% by the end of Q1 ’23. And assuming Deputy Governor Heath’s view regarding how long the policy rate is to remain at its terminal level is adopted by the board, the door for reductions of the policy rate should only open by Q4 ’23 when Deutsche anticipate two 50bp cuts of the overnight rate to bring it to 10% by year-end.

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