MNI BANXICO WATCH:Another 25BP Cut Expected, Focus On Guidance

The Central Bank of Mexico is expected to deliver a third consecutive 25-basis-point rate cut on Thursday, lowering the overnight interbank rate to 7.25% after four 50-basis-point reductions in the first half of the year.

Banxico’s aggressive rate cuts in the first half of the year and continued easing in the second half came after progress in bringing inflation closer to the 3% target, but it is now nearing the neutral level of its policy rate. Most analysts expect the terminal level to be around 6.50%, still slightly restrictive, though this has yet to be clearly communicated by the central bank.

Annual INPC inflation was 3.76% in September, up from 3.57% in August, while core inflation stood at 4.28%. Headline inflation remains within the central bank's 3% target range, which allows for a one-percentage-point variation in either direction.

HEATH DISSENT

Banxico cut by 25 basis points to 7.50% last month, with Deputy Governor Jonathan Heath dissenting for a third time, voting to hold at 7.75%. The board said it will continue evaluating “further adjustments” at upcoming meetings.

Banxico’s former head of industrial sector analysis Pau Messeguer Gally and its former director of economic studies Alejandro Werner have both told MNI that the central bank is likely to maintain its pace of 25bp cuts in upcoming meetings, with Messeguer pointing to a terminal rate might be around 6.50%. Werner said Banxico could have more room to ease if the Federal Reserve signals a clear dovish stance over the coming months, potentially strengthening the peso. (See MNI INTERVIEW: Banxico To Stick With 25bp Cuts Pace, No Pause and MNI INTERVIEW: Banxico Can Cut More If Fed Turns Dovish - Werner)

Former Banxico deputy governor Javier Guzman told MNI he expects more cuts, but said the board should proceed cautiously, conditioning forward guidance to a more data-dependent approach to avoid unsettling inflation expectations. (See MNI INTERVIEW: Banxico To Keep To 25bp, Caution Needed - Guzman)