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JP Morgan Expects 25bp Cut This Week, In Split 3-2 Decision

MEXICO
  • JP Morgan expects Banxico to cut rates by 25bp to 10.75% in a divided 3-2 decision this week. However, the decision is not expected to be straightforward and should keep Banxico on edge. JPM still expects only two cuts for the rest of 2024, bringing the policy rate to 10.5%. For next year, they eye rates at 9%, but with meaningful downside if stability risks ease, and a tight fiscal policy is confirmed.
  • Incoming information has complicated Banxico’s guidance, particularly on the inflation front. However, JPM believes the arguments in favour of a cut are strong enough to prompt a move. Core inflation remains on a steady downtrend and most members of the board have emphasised that core CPI is the one that matters for policy. Secondly, the Board signalled downside risks to activity in June and fears have been confirmed since, with Q2 growth disappointing.
  • The most important arguments for JPM are the degree of policy tightening that has dominated and the Fed factor. With the ex-ante policy rate above 7% and the Fed expected to cut in September, JPM strongly believe Banxico needs to seize the opportunity to gain traction in the normalisation process considering that the road to neutral levels (around 7%) is still long and winding.
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