Bank of Mexico: Not easing until the start of Q2 of next year - TDS

Sacha Tihanyi, Deputy Head of Emerging Markets Strategy at TDS, explains that they see inflation decelerating much less rapidly through 2018. Banxico could start easing in April according to them. 

Key Quotes: 

“For the price perspective past the end of this year, our projection for 2019 is less constructive due to still high current inflation within the context of elevated expectations and the potential for energy price shocks to interact positively with expectations. This however does not nullify the chance that Banxico will ease in 2019 even if inflation remains above target and converges more slowly. We are optimistic that expectations should begin to fall more rapidly once the current energy price surge begins to dissipate, this may not be for a period of time, though peso stability is very helpful for supporting a quicker convergence in expectations.”

“We are thus changing our long-held rate call for Banxico to begin easing in December, to a view that easing will begin at the first meeting in Q2 (April), and then proceed at a 25bp cut at every other meeting. This will imply an end of 2019 overnight rate of 6.50%. We see cuts continuing in 2020, to reach a floor of 5.25% in the overnight rate by October.”

“We note that inflation uncertainty is further clouded by risks posed by the upcoming fiscal budget, though the exact scope and speed of implementation of the Lopez-Obrador administration's fiscal policy agenda remains unknown. We see the potential for an increase in fiscal expenditure to pressure not only inflation, but also the current account deficit. With a relatively tight labour market and strong wage growth, in the presence of still elevated inflation expectations, the potential for an opening of the fiscal spigots to complicate Banxico's inflation outlook remains elevated.”