MEXICO: BofA Expects Banxico To Pause After 25bp August Cut
Jul-02 16:57
- BofA expects core inflation to keep rising to peak at 4.5% in November, driven by high wage growth and last year's MXN depreciation. They see this as a risk for Banxico in the short-run, which may force it to pause its easing cycle. However, a weak economy and a strong MXN will likely bring core down in 2026, opening the door for sub-7% rates.
- BofA expects one more 25bp cut in August, before Banxico pauses through year-end. They note it may not even be able to cut in August if core inflation keeps increasing.
- However, once core inflation recedes next year, they think Banxico will likely find room to cut rates by 100bp to 6.75% by end-2026. They expect these cuts in H2 2026, when the Fed cuts rates, although they note the risk of earlier moves from both. They see downside risks to their 6.75% forecast, with a possibility that the policy rate falls inside its neutral range.
- Given the uncertainty around inflation, BofA sees risks for front-end rates to drift higher should Banxico pause in August. However, they prefer to focus on the medium term, where they expect rates to be 75bp lower than the market implies. Therefore, once uncertainty around a short-term hawkish Banxico surprise is cleared, they believe there could be meaningful value in the belly and the back-end of the curve.
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