On Thursday, four out of five Bank of Mexico board members voted to cut the policy rate by 25bp to 8.00%, the first cut since 2014. According to the Research Department at BBVA, the majority finally come round to the view of the need for monetary policy easing with a real ex-ante rate above 4.0% in a context of a weakening economy and falling inflation. They expect an additional 25bp rate cut before year-end and 100bp worth of cuts to 6.75%, by year-end 2020.
“The rate cut was warranted. We have been arguing that Banxico has been overly cautious and its tone more hawkish than needed. This was the second meeting in which we argued why we would have voted for a rate cut and we have been expecting the start of the easing cycle in the summer as soon as inflation stood below 4.0%.”
“We continue to think that and what we find surprising is not the decision but the tone of the statement, which remained largely unchanged, cautious and (relatively) hawkish. The Board said that the balance of risks for growth remains “biased to the downside”. As for inflation risks, in light of the recent decline, Banxico continues only to implicitly signal that risks are balanced and that “there is still marked uncertainty in the risks that could influence inflation”. We, on the contrary, believe that inflation risks are tilted to the downside."
“There is no forward guidance in the statement whatsoever. Of course, no central bank should pre-commit to future movements of interest rates, but communication is another tool and forward guidance is important.”
“One would have expected more dovish tweaks and/or some hints to future actions that of course will depend on incoming information. As we have mentioned before, the cut had no significant effect on the MXN, as rate cuts were priced-in and as the risk adjusted carry trade remains among the highest in the emerging market world. In this aspect, there is still plenty of room to cut."
“We continue to expect an additional 25bp rate cut (to 7.75%) before year-end and 100bp worth of cuts (to 6.75%) by year-end 2020 as they seem to finally come to the view that easing is needed and with inflation falling they now seem to believe more in their own expected inflation path. Albeit their communication is poor, with inflation set to fall further, the Board now seems to be open to change its (still) restrictive stance. That requires several rate cuts. We continue to think that more are on the way and that today’s cut marks the start of a long overdue and needed easing cycle.”
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers.