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We expect cuts to resume later this year.
2024/06/18 | Julio Ruiz

While the latest monetary policy statement (May 9, see our note) and its corresponding minutes suggested a rate cut in the June 27 policy meeting, recent developments led us to change our call for another pause at 11.00%, from our forecast for a 25pb cut. In the most recent monetary policy meeting statement, the monetary forward guidance was changed slightly, adding the word “adjustments”, which in our view opened the possibility for a rate cut in the June meeting: “Looking ahead, it will assess the inflationary environment in order to discuss reference rate adjustments”. Likewise, in the corresponding minutes, at least three board members seem opened to evaluate a rate cut in the next meeting.


Macroeconomic conditions (see table below) have not changed significantly since the last monetary policy decision, except for the currency which experienced a sharp depreciation in the aftermath of the June 2 general election.  Core inflation continued easing, while medium- and long-term inflation expectations remained relatively stable. Moreover, 2Q24 inflation prints seem consistent with the central bank’s inflation forecasts. Annual average headline and core inflation for April and May came in at 4.67% and 4.29%, respectively, which compares with Banxico’s 2Q24 headline and core inflation forecasts of 4.6% and 4.3%, respectively.



While the sharp currency depreciation could pressure inflation’s outlook, passthrough estimates in Mexico are relatively small. A Banxico study estimates the elasticity of inflation to exchange rate (pass-through) at 0.04 in in the short term (accumulated 12 months) and 0.06 in the long term. In other words, a 10% depreciation could result in 40-bp accumulated in the next 12 months after the shock. We built several simulations with our model (details of the model can be consulted in this link) to get a sensibility of the pass-through given different scenarios for the currency. The orange line below is our base scenario for headline and core inflation. This simulation has an assumption of the USDMXN at 17.9 and 18.9 for 2024 and 2025, respectively. As we mentioned in our most recent monthly scenario (available here), our currency call has a clear upside bias, mainly reflecting higher risk premium, in turn, associated to policy uncertainty. Then we built two scenarios:  (1) the black line below is the inflation forecast assuming the USDMXN is at 18.8 for 2024 and 2025 and (2) in the blue line below is the inflation forecast assuming the USDMXN stays at 18.8 for 2024 and increases further to 19.5 in 2025.



However, we think board members that were open for a rate cut in June are likely to pause to avoid further volatility in the USDMXN amid elevated policy uncertainty.  Governor Victoria Rodriguez, among the members open for a rate cut, expressed caution in the recent episodes of currency volatility, noting that they were ready to intervene in the market in periods of “atypical behavior or extreme volatility”. In our view, these board members are likely to give a greater weight to financial stability concerns (expressed as currency volatility) in the current market backdrop, at the expense of keeping the policy rate unchanged for a second consecutive meeting, considering the highly restrictive stance relative to the smaller inflationary gap. As such, our base scenario now is for Banxico to keep its policy rate unchanged at 11.00% in the June 27 meeting.



Looking forward, we think Banxico is likely to resume the easing cycle in subsequent meetings given the still highly restrictive monetary policy stance, the pace of the ongoing disinflationary process (although slightly slower due to the depreciation of the currency) and the start of Fed’s easing cycle.  Our change in call for a second consecutive pause, rather than a 25-bp cut, is a tactical recalibration in the cycle, not a change in the overall gradual easing stance. Our end of year policy rate still stands at 10.00%, but with the risk of another pause.


Julio Ruiz