MNI BANXICO PREVIEW - March 2021: The Final Cut

The full preview and analyst views can be found here:

MNI Banxico Preview March 2021.pdf

The Final Cut: Markets split, but balance of risks points to final Banxico rate cut

Global macro developments as well as domestic inflationary pressures have created trepidation in markets, prompting many analysts to adjust their calls for Thursday's decision. We believe, in a close split decision, Banxico are more likely to cut the overnight rate, one final time, by 25 basis points to a cycle low of 3.75%.

State of Play: Expectations for inflation were revised higher for 2021 in the latest Banxico survey. The median expectation for headline inflation (year-end 2021) rose from 3.66% to 3.9%. The median expectation for the core reading increased by just 1 bp to 3.58%. Accelerating non-core inflation due to energy prices and base effects continues to be factored in to central bank forecasts, expecting the headline to rise above the ceiling of the 3% +/- 1 percentage point target in H1 and fall thereafter.

The most recent mid-month CPI print of 4.12% y/y, above the ceiling of the target highlights the short-term pressures facing the board and reduces the risk of a unanimous dovish surprise at Thursday's meeting. However, we believe the market doing a complete U-turn and now pricing hikes into the 1 year sector of the curve may be premature. The economic recovery remains fragile and Covid vaccinations have commenced at a slow pace. The MPC have continued to acknowledge the weak growth dynamics (anticipating ample slack over the relevant policy horizon) amidst a backdrop of "uncertainty and significant downside risks".