MNI Banxico Preview - Nov 25: Majority to Maintain Easing Bias
Executive Summary
- Banxico is expected to deliver another 25bp rate cut on Thursday, bringing the overnight target rate down to 7.25%.
- Although core inflation remains stuck above the ceiling of the 2-4% target range, the majority of the Board continues to place more emphasis on the weakness of economic activity, highlighted by a contraction of the economy in Q3.
- Nonetheless, the vote is likely to be split once again, with Deputy Governor Heath continuing to focus on the stalling of the core disinflation process. Focus will therefore remain on the forward guidance, which is likely to keep the door open to further easing ahead given the backdrop of Fed rate cuts and a resilient Mexican peso.
The Board of the central bank of Mexico continued to strike a dovish tone at its previous monetary policy meeting in September, emphasising that sluggish domestic growth and ongoing trade tensions continued to pose significant downside risks to the outlook. Despite some concerns about the persistence of core CPI inflation, the majority of the Board still felt comfortable that these downward pressures on growth would bring inflation back to target over the course of next year, allowing them to continue with the easing cycle. Against this backdrop, the Board kept its forward guidance unchanged, suggesting that the current easing pace should be expected to continue in the coming meetings, especially with the Fed back in easing mode.
Subsequent economic data have reinforced those expectations, particularly the contraction of the economy in the third quarter, which added to concerns about a widening negative output gap. Nonetheless, the stickiness of core inflation above the ceiling of Banxico’s 2-4% target range remains a source of concern, particularly for Deputy Governor Heath who dissented with another vote to remain on hold in September. He remains concerned about high inflation as well as the mounting upside risks to the outlook, including possible tariffs on Chinese imports, which he believes are not being considered by the committee and warrant caution.
