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MEXICO: JP Morgan Expects Banxico To Cut By 25bp This Week

MEXICO
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  • JP Morgan thinks the case for a Banxico rate cut is even stronger than in August. The Fed factor and the validation of the temporary nature of the non-core shocks will add to downbeat growth expectations for the following quarters and as the board seeks to gain momentum in order to bring the policy rate closer to a neutral stance next year, around 8%.
  • Although there are some concerns related to sticky inflation expectations and forthcoming wage adjustments, the board is aware that refraining from easing now could complicate its room for manoeuvring next year, when fiscal challenges, bilateral tensions, and the risk of further MXN weakness in the context of downgrade risks could result in a ‘monetary policy trap’: a higher terminal rate for longer.
  • The risk of a 50bp cut should not be ignored, and JPM thinks a dovish pro-50bp cut dissenter could be present as soon as this week, precisely in the context of a broader window swiftly opened by the Fed this month. JPM currently expects a pause in November, but as things stand right now, this is looking not very compelling even if policy and political risks are expected to re-emerge soon.
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  • JP Morgan thinks the case for a Banxico rate cut is even stronger than in August. The Fed factor and the validation of the temporary nature of the non-core shocks will add to downbeat growth expectations for the following quarters and as the board seeks to gain momentum in order to bring the policy rate closer to a neutral stance next year, around 8%.
  • Although there are some concerns related to sticky inflation expectations and forthcoming wage adjustments, the board is aware that refraining from easing now could complicate its room for manoeuvring next year, when fiscal challenges, bilateral tensions, and the risk of further MXN weakness in the context of downgrade risks could result in a ‘monetary policy trap’: a higher terminal rate for longer.
  • The risk of a 50bp cut should not be ignored, and JPM thinks a dovish pro-50bp cut dissenter could be present as soon as this week, precisely in the context of a broader window swiftly opened by the Fed this month. JPM currently expects a pause in November, but as things stand right now, this is looking not very compelling even if policy and political risks are expected to re-emerge soon.