Itaú BBA - Policy-Rate cuts in 4Q19

Scenario Review - Mexico

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Policy-Rate cuts in 4Q19

March 14, 2019

After his first 100 days in power, AMLO enjoys strong support

For the full version with all charts and tables, please open the attached pdf file
 

• After his first 100 days in power, AMLO enjoys strong support from the population, despite facing some troubles. Likewise, his support in Congress is growing, facilitating the implementation of his policy agenda.

• Rating agencies warned AMLO’s administration about the risks of continuing with some of his policies, but refrained from any downgrade. We think that rating agencies will evaluate the performance of public finances and the effect of new policies on the economy this year, before announcing any change in Mexico’s sovereign rating.

• We revised our GDP forecast for 2019 to 1.4% (from 1.7%). Uncertainty over the direction of domestic policy and remaining uncertainties about the approval of the USMCA by the U.S. Congress are weighing on investment, while deceleration in the U.S. economy is limiting exports. In this context, the labor market is weakening, curbing consumption growth. 

• Meanwhile, inflation fell within the range around the target in February. We believe that with inflation falling and growth below potential, the central bank will have room to start a gradual normalization cycle, as long as uncertainty abates (and so do risks for the currency and inflation). As a result, we now expect Banxico to deliver two 25-bp rate cuts in the last quarter of 2019 (reaching a rate of 7.75% by year-end) and four 25-bp cuts in 2020.
 

João Pedro Bumachar
Julio Ruiz

 

For the full version with all charts and tables, please open the attached pdf file



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