MNI Banxico Preview- Dec 25: Cut Seen, Hawkish Risks Prevalent
Executive Summary
- Banxico is expected to deliver another 25bp rate cut to 7.0% on Thursday as it continues to respond to weak activity data, which revealed a contraction of the economy in the third quarter.
- However, recent stronger-than-expected CPI inflation data have significantly increased the risk of a pause in the easing cycle, if not this week, then more likely early in the new year, keeping focus on the forward guidance.
- At the very least, the persistence of core CPI inflation above the central bank’s target range ceiling adds to risks that another Board member, most likely Deputy Governor Borja, joins Deputy Governor Heath in dissenting with a vote to remain on hold.
After striking a more cautious tone in November, amid persistent core inflation pressures, latest CPI data have reinforced prospects for a pause in the easing cycle in the near future. Last week’s inflation data certainly raise the risks of an additional dissenter at Thursday’s meeting, especially considering that the central bank’s core inflation forecasts were revised higher again last month. In addition, the Board also amended its forward guidance in November to say that it will “evaluate reducing the reference rate” ahead, rather than “assess further adjustments to the reference rate”, drawing attention to the possibility of a pause soon.
The most likely new candidate to dissent would be Deputy Governor Galia Borja, especially given her hawkish remarks immediately after last week’s inflation data. Borja noted that the balance of risks to inflation remains tilted to the upside, and that next year will bring additional risks such as increases in some taxes, uncertainty on tariffs and the USMCA renegotiation.
