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Goldman Sachs See Banxico On Hold This Week, With Risk Of 25bp Cut

MEXICO
  • Given the recent domestic and external macro-financial developments, Goldman Sachs expect the MPC to hold the policy rate at 11.00%. They assess a 25-30% probability of a 25bp rate cut in a 3-2 split decision. The probability of a cut would go up in the case of a significant mean-reversion of the post-election MXN depreciation ahead of Thursday’s meeting.
  • The MXN dislocation of the last couple of weeks may lead to further deterioration of inflation expectations, and MXN depreciation was one of the upside risks to inflation identified by the MPC at the last meeting. However, GS highlight that the recent depreciation shifted the MXN/USD from over-valuation to broad alignment with theoretical fair-value. The MPC should also take into consideration that the post-election backdrop remains volatile, and the US election cycle is looming large.
  • All in, were it not for the increase in risk-premia post-election GS would expect a 25bp cut, but the recent developments and heightened near-term uncertainty demand caution: a cut could potentially further destabilise the MXN. The MPC may combine a hold decision with Forward Guidance that suggests a reasonable probability of a cut at the August 8 meeting.

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