Mexico: Banxico should cut rate at least 75bps – BBVA

Analysts at the Research Department at BBVA continue to expect the Bank of Mexico (Banxico) to cut rates much more than currently expected, at least until real rates are close to 0%. On Thursday the Board will have its May meeting and market consensus point to a 50bps cut. 

Key Quotes: 

“We continue to expect Banxico to cut rates much more than currently expected, until real rates are close to 0%. Banxico should cut the policy rate by at least 75bp this Thursday. We think that a 100bp cut would be more adequate. A freefalling economy and much lower inflation in a context of excessively high real interest rates overwhelmingly supports the case for faster easing. Lower rates would lower the financial burden of firms and families, would allow firms to refinance their debts at lower rates, would make Banxico´s liquidity measures much more effective, and would open the door to the federal government if at some point it decides to run a countercyclical fiscal policy to finance it with debt issuance at better terms.”

“A hawkish Board and one of the most hawkish central banks in the world make us wonder whether they will start to take a bolder step this week. Unfortunately, the chance of a milder 50bp cut is not low. Nonetheless, we expect a 75bp rate cut to 5.25%. In any case, we think that the rate cut cycle has more legs than what markets and analysts are currently pricing in and anticipating. We continue to expect that the monetary policy rate to reach 3.0% by year-end, well below the 4.75% level currently expected by consensus and the around 4.5% priced in by markets.” 

“Even if GDP ends up contracting -7.0%, GDP will not recover the 4Q18 level until 1Q24 ie, not only the negative output gap will widen significantly in the short term reaching levels never seen before, it will most likely remain negative for years to come. Banxico could take for granted that there will be no demand-side pressures whatsoever in years, and there will be downside pressures on inflation arising from a weak demand at least in the short term. In this context of depressed aggregate demand, exchange rate pass-through will be insignificant.”