Mexico: Banxico strikes again a remarkably and warranted dovish tone – BBVA

On Thursday, the Bank of Mexico, as expected, cut the monetary policy rate by 50 basis points to 4.5%. According to the Research Department at BBVA, B  |  14/08/2020 18:02

On Thursday, the Bank of Mexico, as expected, cut the monetary policy rate by 50 basis points to 4.5%. According to the Research Department at BBVA, Banxico’s notably dovish tone alongside a widening negative output gap backdrop points to further interest rate cuts. They continue to expect a further 150bp of cuts, taking the policy rate to 3.00% by year-end.

Key Quotes: 

“More easing is the most likely scenario and in our view Banxico will not find reasons to slow the easing pace in the coming meetings. Albeit it is true that headline inflation will accelerate somewhat more (to 3.8-3.9% in Aug-Sep), core inflation will likely resume its downward trend as early as August. Moreover, a headline rate close to 4.0% should not be a concern given that it would be driven by a base effect considering the unusual -0.02% MoM headline inflation print in August 2019.”

“We agree with Banxico in that inflation, both headline and core, will hover around 3% in a 12 to 24 month horizon. We are sticking with our call of three additional 50bp rate cuts in 2020 but the risk is that Banxico could slow down the easing cycle if there is a negative surprise in core inflation between now and the next scheduled monetary policy meeting (Sep 24).”

“As long as the peso continues to hold up –our baseline scenario–, Banxico will likely continue to ease its monetary policy stance.”

“The deepest recession on record alongside a favorable context for inflation going forward warrants additional easing, at least until the real policy ex-post policy rate is close to 0.0%.”

“We continue to expect a further 150bp of rate cuts in the easing cycle, taking the policy rate to 3.00% by year end ie, we are sticking with our call of 50bp cuts in the policy rate in each of the three remaining scheduled meetings in 2020.”

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