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Sep 26 2019, 07:18 PM (+06) | Orbex.com

Tomorrow we have what’s likely to be the most important economic event for the Mexican peso this month: the central bank’s interest rate decision.

From the beginning of the year, economic data had been getting in the way of a rate cut that the government desperately wanted. It seems that the conditions have finally been met for the bank to take action.

Most other countries cut their reference rates, including the US, Mexico’s largest trade partner. That means Banxico is behind the curve.

They stood by their commitment to price stability, despite having effectively the highest rate in the world. Even if they were to cut this time around, Mexico wouldn’t lose that somewhat dubious distinction.

What We Are Expecting

The market is so confident that Banxico will cut that analysts are mostly focusing on the question of by how much.

Last week the Fed cut rates, which provides more room for the Mexican central bank to take action. And, in the time, since the last meeting when they cut rates, data has continued to trend in the direction that would support, if not outright call for, more easing.

Inflation remains below 4% and the lowest it has been in years. In fact, we can expect it to continue to decline for the rest of the year from lower agricultural prices.

The bump up in the price of oil is looking to be short-lived as Aramco insists they will have production back on schedule real soon.

The Trends

Last meeting’s decision was 4-1 in favor of the cut.

After that, Q2 data reported a -0.8% in non-seasonally adjusted growth. This was a significant drop from the prior trend.

Retail sales have slipped into negative territory (belying prior assertions of President López that consumer demand was increasing), and the unemployment rate ticked up a decimal.

Of course, it was too soon for the rate cut to have a significant impact on economic data. That might give the Banxico some pause in taking a more drastic 50 basis point cut, waiting to see the effects of their policy.

The Path Forward

The current rate is at 8.0%The consensus among analysts is that it will be cut to 7,25% by the end of the year. This would be the equivalent of three cuts distributed over four meetings. The question for the market has more to do with the timing than the long-term outlook.

We shouldn’t forget that the market tends to get ahead of itself in expecting rate cuts.

Banxico is adamant about maintaining price stability. Andinflation, though lower than before, is still above their target range.

If the theory advanced by many analysts that the central bank in Mexico is keeping pace with the Fed is true, then there isn’t a reason for more than a 25 point cut this time. And further reductions in the future would be doubtful given Powell’s most recent comments.

Market Reaction

The market is clearly pricing in at least a cut. So, we could have a relatively small reaction if the Banxico’s decision is more conservative.

What could drive reaction is the vote split, to see if there is confidence in keeping the easing bias. The other is if the bank puts more emphasis on the statement on inflation rather than the economy, it would indicate a slower, more conservative cutting cycle than currently anticipated.

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