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A first rate cut is likely in 1Q24.
2023/12/14 | Andrés Pérez M. & Julio Ruiz

Banco de Mexico (Banxico) unanimously maintained the policy rate at 11.25%, in line with our forecast and market expectations (as per Bloomberg). While the monetary forward guidance of keeping the reference rate at its current level “for some time” was unchanged relative to the previous statement (November), upward inflation revisions, mainly in the core index in 2024, gave a hawkish tone to the statement, in our view. The one-year ahead real ex-ante rate currently stands at 7.22%, substantially above Banxico’s neutral rate estimate of 2.6%.


The increase in the core inflation forecast incorporates a more gradual decline in core goods food and services inflation. Quarterly annual core inflation was increased 20-bp in each of the quarters of 2024, reaching 3.5% in 4Q24. Headline inflation increased to 3.5% in 4Q24 (previously at 3.4%). Still, both headline and core inflation are expected to converge to the target in 2Q25, as in the previous communique.


The balance of risks for inflation remained tilted to the upside. Upside risks to inflation include, persistence of core inflation, currency depreciation, greater cost related pressures, a greater than expected resilience of the economy and pressures on energy or agricultural prices. On the other hand, downside risks for inflation include a faster than anticipated slowdown of the global economy, lower pass-through from cost related pressures and the appreciation of the currency.


We think that a first rate cut is likely in 1Q24. While the hawkish tone of the statement increases the odds of the start of the easing cycle in March, we do not rule out a rate adjustment in February given the shift in the Fed’s guidance. Still looking forward, we think there are still relevant upside risks to inflation next year (such as, a large expansionary fiscal stance and another large minimum wage hike) which could lead Banxico to maintain a restrictive policy stance for longer, without ruling out pauses between meetings once the easing cycle begins. Our end of next year policy rate forecast stands at 9.00%.