Monterrey.- Despite the recent currency weakness, the Bank of Mexico could cut its reference interest rate by 25 basis points, to 10.75 percent, at its monetary policy meeting on Thursday, Barclays economists estimated.
In a report, the brokerage noted that with data showing a slowdown in the U.S. economy, Banxico will see a window of opportunity with markets pushing for more cuts from the Federal Reserve.
He noted that the exchange rate could keep Banxico’s governing board cautious, but the later it starts, the faster it will have to cut rates.
The brokerage noted that the Mexican economy is also slowing and inflation has already fallen. And while it is true that inflation is rising at the moment, real rates are among the highest in emerging markets and Banxico has been slow to react, possibly waiting for the Fed as inflation in other services eases.
Regarding the exchange rate, economists expect the peso to also underperform in a U.S. slowdown, given the strong ties between the two economies.
On the rate cut, BBVA Research said its baseline scenario is for a split vote of 3 to 2 in favor of a 25 basis point rate cut, with a majority of Governing Board members acknowledging a weakened economy and greater confidence in the inflation outlook.
Although it said the recent depreciation of the peso, following global volatility over the weekend, represents a risk to its outlook, BBVA Research considered that a rate cut is warranted given the continued slowdown in underlying inflation and increased risks to downside economic activity.
He also said any inflationary impact from the exchange rate would likely be more than offset by weaker economic activity.
But given Banxico’s unique mandate of price stability and considering the arguments available to board members, the financial institution said there is a possibility of a 3-2 or 4-1 vote in favor of maintaining the rate at 11 percent and extending the pause despite continued signs of weakness in economic activity and an improvement in the outlook for underlying inflation.
But extending the pause would lead to the policy stance remaining very tight through 2024-25 and would be a policy mistake and a communication mistake, and risk the need for a larger 50 basis point rate cut at the next meeting in September.
On the other hand, in the Citibanamex Expectations Survey, released today, the consensus estimates that the next move to the monetary policy rate will be a cut of 25 basis points at the September meeting. In the previous survey, the expectation was for a cut of that magnitude at the August meeting.
The survey also reported an increase in exchange rate expectations, which at the end of this year are at 19.00 pesos per dollar, higher than the 18.80 of two weeks ago.
#Banxico #expects #interest #rate #points
