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Pantheon Say No Rate Cuts In The Very Near Term

MEXICO
  • Policymakers noted that domestic financial conditions have improved since the previous meeting, that the MXN rebounded, and that economic activity has been resilient, despite the challenging external environment. The job market remains strong, according to the Bank, and the risks to economic activity remain balanced. Pantheon disagree; a U.S. recession is a big threat to Mexico.
  • On the inflation front, the Board noted that the picture is improving, with both headline and core inflation falling. The Bank’s inflation expectations for this year were revised downwards, slightly, while those for core inflation were little changed.
  • The Board have emphasized that rates will be on hold for a prolonged period, until inflation consistently fall towards the target and the balance of risks improves. Patheon think that this will happen over the second half of the year. Underlying inflation pressures are falling rapidly, and both leading indicators and survey data suggest that the inflation picture will continue to improve over the next three-to-six months.
  • At the same time, Patheon expect economic activity to soften across the second half of the year. Moreover, a U.S. recession is a real threat, and Pantheon expect a dovish shift in the Fed’s monetary policy to open the door for Banxico rate cuts, from Q4 onwards or perhaps even in late Q3. Mexico’s ex-ante real rate is rising rapidly, and likely will be around 7.5% by year-end; that is simply unsustainable
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