MXN: Growth concerns outweigh inflation – Commerzbank

It was the expected close decision. By a vote of 3-2, the Mexican central bank (Banxico) yesterday decided to cut interest rates by 25 basis points to 10.75%, Commerzbank’s FX strategist Michael Pfister notes.

Peso set to remain under pressure

“At the same time, the statement clearly indicated that rate cuts could continue in the coming months. This was despite an upward revision to the headline inflation forecast for the end of the year. Banxico seems to be focusing more on the core rate, which is less volatile and, in the eyes of policymakers, has more of a downward trend.”

“In my view, the rate cut sends a very clear signal: inflation no longer seems to be Banxico's main focus, but growth concerns (also underpinned by the second quarter figures, which were again weak last week) prevail. This is certainly justified, given that the real interest rate remains clearly positive even after the decision.”

“However, it should be noted that the core rate has recently given little indication that the inflation target will be reached in the next year and a half. And US recession concerns are unlikely to go away. Given these risks and the fact that Banxico has acted despite the MXN depreciation, we feel confirmed in our view that the Peso will remain under pressure.”