Mexico: Likelihood for a 50bp cut from Banxico diminishing – TDS

Sacha Tihanyi, deputy head of emerging markets strategy at TD Securities, suggests that an apparently less dovish Banxico policy board reduces the likelihood for a 50bp cut in the near future but it remains on a trajectory to continue 25bp cuts.

Key Quotes

“The most relevant takeaways from the Banxico statement include the change in bias of voters dissenting for more than a 25bp cut, expectations regarding the growth outlook, as well as wage growth dynamics in the face of core inflation developments.”

“Perhaps the biggest surprise was that only one member of the five-person board voted for a 50bp cut, versus the two members that had been dissenting for 50bps at the previous two meetings.”

“Banxico expects, based on preliminary Q4 data, that the economic weakness of by now many quarters is expected to persist, and that this implies that negative slack conditions have widened with respect to those observed in Q3.”

“While the agreement to approve the USMCA is seen as helpful for macro-financial conditions by Banxico, policy makers continue to point to the risk from both a Pemex and sovereign credit downgrade, and also now possible contagion from EM economies (particularly in Latin America). These factors are in our view key reasons as to why Banxico will stay away from 50bp cuts and favour a more gradual approach for the time being.”