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Another Cut From Banxico?

Dec 19 2019, 08:07 PM (+06) |

The simple answer appears to be a near-universal, “yes”.

It seems that the only open question now is whether it will be a 25 basis point cut or a 50 pointer. Last week´s inflation report showed that it had slipped by a hair below the bank’s target. And they appear to be intent on making the most of it to support the economy!

With holiday trading looming immediately after the interest rate decision, most traders seem to be focusing on the implications for next year. If the Banxico cuts rates, it will be a decoupling from the Fed’s policy.

Initial moves by the Mexican regulator were seen as necessary to keep pace with easing from their northern neighbor.

The Trajectory

Even after three back-to-back rate cuts, and a fourth coming up, Mexico still has the highest interest rates in the world when adjusted for inflation. However, this hasn’t translated into extraordinary strength for the MXN, mostly out of concerns over the domestic situation.

The currency has been gathering some headwinds against the dollar following the announcement that the USMCA deal was finally moving forward in the US Congress.

Analysts have moved on from projecting that Banxico will take an insurance approach to maintain the interest rate spread with the country’s largest trade partner. The consensus is that, as long as inflation stays close to the target rate, they will be cutting rates as much as they can.

That would imply that economists are looking at a further five rate cuts by the end of next year. And this would leave the rate at 6.0%.

We Don’t Expect it to be Smooth Sailing

A major challenge to the peso and the central bank going forward is the 20% increase in the minimum wage. The increase was approved by Congress and will go into effect next year. This is after an already significant 16% increase this year.

That, it should be noted, didn’t cause the inflation rate to explode. So, perhaps the same will happen next year.

Banxico sees the economy as essentially flat this year. The bank forecasts growth to be between -0.2% and +0.2%, after the technical recession at the start of the year. For next year, they cut the growth outlook to just 0.8-1.8%, which would increase pressure for further easing policies.

So, What About 50 Points?

There seems to be little chance that the Banxico will cut more than 25 points at the next meeting. And the market appears to agree!

The bank has to thread the needle between lowering rates but not allowing inflation to get out of hand, and erasing the positive effect of more money in the economy.

Despite what is pretty sure to be four consecutive rate cuts, the Banxico still wants to keep its independent and conservative reputation. This would help prevent too much weakness in the MXN.

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