MNI WATCH: Banxico Expected To Ease 50BP Again To 8.50%

The Central Bank of Mexico is widely expected to cut its overnight interbank interest rate by another 50 basis points to 8.50% on Thursday, in what will be a seventh consecutive reduction amid easing inflation — despite a recent rebound — and weaker economic activity.

Banxico increasingly sees a net downside impact from U.S. tariffs in its assessment of the overall balance of risks, which was still tilted toward higher inflation at the time of its last meeting in March, MNI reported last month. (See MNI POLICY: Tariff Risks Tilt To Downside For Banxico)

At the time of that decision, the board saw both upside and downside risks to inflation from tariffs, with the upside risk stemming from a potential depreciation of the peso, while the downside risks were linked to an economic slowdown. Since the meeting, however, the risk of a slower economy due to the U.S. trade onslaught has begun to outweigh inflationary risks in Banxico’s assessment.

MEXICAN PESO

The Mexican peso has appreciated from a low of 20.84 to the dollar on April 8 and is now trading around 19.60, easing concerns at the central bank about an exchange-rate-driven inflation surge.

In contrast, risks to economic activity now appear more pronounced, especially amid expectations of a sharper global and U.S. economic slowdown, which would create more room for further rate cuts in Mexico this year.

Mexico's annual INPC inflation stood at 3.93% in April, matching the 3.90% consensus forecast and up from 3.80% in March. Core inflation was also 3.93%, in line with the 3.92% consensus and up from 3.64%.

But recent progress in bringing inflation closer to the 3% target was the main reason behind the Bank of Mexico’s decision to accelerate its easing cycle in March, cutting rates by 50 basis points to 9.00% and signaling a further loosening of policy.

CONTINUE EASING POLICY

The board is expected to continue easing monetary policy, likely cutting rates by another 50 basis points this week as signaled, even amid global uncertainty surrounding U.S. trade policy, former Banxico deputy governor Manuel Sanchez told MNI recently. (See MNI INTERVIEW: Banxico To Keep Easing As Tariffs Hit - Sanchez)

Former senior Banxico economist Alberto Armijo also told MNI that Banxico is likely to take advantage of a window of opportunity to ease further as the U.S. focuses its tariff offensive on China, cutting its interest rate twice more by 50 basis points to reach 8.00% by June.  (See MNI INTERVIEW: Banxico May Pause Rate Cuts After June - Armijo)

But Oscar Galvez-Soriano, a former Banxico economist, said in an interview that Banxico will be limited in its ability to expand the scope of its easing cycle in response to the impact of U.S. tariffs due to concerns over inflation. (See MNI INTERVIEW: Banxico Limited In Ability To Respond To Trump)