MNI WATCH: Banxico Set to Hold Rates Amid Peso Weakening

The Central Bank of Mexico is expected to hold its overnight interbank interest rate at 11.00% Thursday for the second consecutive meeting, despite board members having indicated that a 25 basis point cut could come as inflation falls.

The deep depreciation of the Mexican peso since the general election on June 2nd, in which Claudia Sheinbaum won a sweeping victory as president, is a key reason markets have moved to predict a rate hold from Banxico this week, with few analysts still betting on a cut.

On election day, the dollar was MXN 16.98 and now is around MXN 18 after peaking at MXN 18.76 on June 12th. The exchange rate drop reflects investors' concern about constitutional changes with a two-thirds majority of the new president's allied parties in Congress.

Last month, Banxico maintained its overnight interbank interest rate at 11% after a 25 basis point cut in March and said that the board might discuss "adjustments" in the next meetings according to the inflationary environment.

The central bank’s governor, Victoria Rodriguez Ceja, said last month an openness to cuts does not mean the battle against inflation "has stopped," reinforcing that policymakers would discuss the possibility of additional easing at upcoming meetings.

BETTER DATA

Former deputy Banxico governor Manuel Sanchez told MNI the central bank should wait for better inflation trends to continue cutting interest rates, adding the board must ensure prices are on a clear and sustainable path toward the 3% target. He believes the monetary authority should stay cautious over its coming meetings, but is likely to cut again before long. (See MNI INTERVIEW: Banxico Needs Better Data For More Cuts-Sanchez)

Mexico's annual INPC inflation was 4.69% in May, below the 4.82% consensus forecast. In monthly terms, prices fell by 0.19% compared with April. Core inflation was 4.21%, compared to the 4.29% consensus. In April, general INPC was at 4.65%.