Mexico: Central bank can cut an additional 200bp without having a significant impact on MXN - BBVA

The Bank of Mexico cut its policy rate by 25bp for the second consecutive meeting to 7.75% as expected. Analysts at BBVA Research consider there is still plenty of room to cut rates and they expect at least 50bp of additional easing by year-end.

Key Quotes: 

“The tone of the statement  was (surprisingly) little changed, as Banxico remains overly cautious in our view and strikes a still somewhat hawkish tone even after two members of the Board pushed for a larger cut.”

“The rate cut has no impact on the exchange rate. This because the MXN high carry trade and the fact that the cut was expected by markets. We think that Banxico can cut an additional 200bp without having a significant impact on the exchange rate. Moreover, Banxico’s Board is losing its fear to cut as they have seen that the last two cuts did not have an effect on the MXN.”

“A larger 50bp cut will remain on the table for November’s meeting; we think that the size of the cut will ultimately depend on core inflation’s performance. If core inflation remains sticky to the downside, Banxico will likely lean towards a 25bp cut, but if it finally begins to slow, a third member might join the two members that already see the need for a faster pace of easing. Thus, we continue to expect at least 50bp worth of additional cuts (to 7.25%) by year-end and 100bp worth of cuts (to 6.25%) by year-end 2020.”