Itaú BBA - A rate cut soon, but not in August

Scenario Review - Mexico

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A rate cut soon, but not in August

agosto 8, 2019

Banxico needs to see a larger reduction in core CPI before starting an easing cycle.

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• Pemex published its business plan without assuming a larger role for the private sector in E&P and with ambitious oil production targets, posing a risk for public finances. Meanwhile, the MoF is considering using some of the resources from the stabilization fund to offset the shortfall in oil and tax revenues due to lower expected oil production and weak economic activity.

• We expect GDP growth for 2019 of 0.6%. Uncertainties from trade relations with the U.S. and over domestic policy direction will continue to limit investment, while the deceleration in the U.S. economy will also curb economic activity. The labor market is also deteriorating during a period of contractionary fiscal policy.

• We expect Banxico to start its easing cycle in September 2019, reaching a rate of 7.5% by the end of this year with three consecutive 25-bp cuts. Despite widening output gap, we believe Banxico needs to see a more significant reduction in core inflation before it feels comfortable starting an easing cycle. The recent weakening of the Mexican peso (induced by global developments) also plays against a rate cut in August.

João Pedro Bumachar
Julio Ruiz

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