MNI Banxico Preview - May 2024: Easing Cycle Pause Expected

Executive Summary

• Most analysts expect Banxico to keep its overnight rate unchanged at 11.00%, with a small minority forecasting an outside chance of a further 25bp cut.
• A more challenging external environment, combined with still persistent domestic inflation pressures, have prompted committee members to adopt a more cautious approach, signalling a likely pause this month.
• However, a still very restrictive monetary stance, with rates far above the neutral level means that many analysts expect Banxico to resume its easing cycle at the next policy meeting in June.

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MNI Banxico Preview - May 2024.pdf

Hawkish Committee Members Highlight Likelihood Of May Pause

Banxico Board members have struck a more hawkish tone in recent weeks, following the spike of FX volatility in the middle of April as Fed rate cut expectations were pared back. Sticky services inflation and a slowdown in the disinflation process has also seen policymakers turn more cautious. In particular, Deputy Governor Heath noted the fact that CPI inflation has not slowed as much as Board members would have liked, while highlighting that the balance of risks to inflation were still tilted to the upside. Significantly, he said that the Bank needs to be patient before continuing with rate cuts, adding that it is hard to think that Banxico can go against the Fed’s monetary policy cycle.

After the brief spike in USDMXN above the 18 level in the middle of the month, Heath also said that’s he’s leaning toward a pause in May, which he said was likely to be a unanimous decision. The Board can then see how the data evolve by June, he added. Banxico Governor Rodriguez also said that the central bank will continue to be cautious in its upcoming monetary policy decision, although she noted that the recent FX weakness was reversed rapidly, and she does not expect it to have an important impact on prices. Rodriguez said that the Board will focus on data in coming rate decisions, adding that services sector inflation has yet to show a clear downward trend.