Banxico seen cutting rates to 7.50% in September

Banxico seen cutting rates to 7.50% in September – Reuters

Reuters poll shows unanimous expectations for a 25 bps cut, with analysts eyeing further easing into November

The survey showed that all 24 economists see Banxico’s cutting rates, as inflation edged slightly up to 3.57% from 3.51% but it remains within the 3% plus or minus 1% range. In the last meeting, the bank cut rates on a 4 to 1 vote split with Deputy Governor Jonathan Heath voting to hold rates unchanged as inflation was well above the 4% threshold in the previous month’s print.

Analysts at Bank of America wrote on a note that “Banxico is likely to continue cutting rates well below market expectations as long as the Fed cuts and the US Dollar remains weak.”

Recently released data showed that lower than expected growth in Q2 and “relatively” contained inflation last month, justified gradual easing by Banxico.

When asked of the date of the Mexican central bank’s reduction, 19 of 24 analysts answered September, with high expectations that another 25-bps cut is expected in November, as said by a majority of 16 economists.

Banxico FAQs

What is the Bank of Mexico?

The Bank of Mexico, also known as Banxico, is the country’s central bank. Its mission is to preserve the value of Mexico’s currency, the Mexican Peso (MXN), and to set the monetary policy. To this end, its main objective is to maintain low and stable inflation within target levels – at or close to its target of 3%, the midpoint in a tolerance band of between 2% and 4%.

How does the Bank of Mexico’s monetary policy influence the Mexican Peso?

The main tool of the Banxico to guide monetary policy is by setting interest rates. When inflation is above target, the bank will attempt to tame it by raising rates, making it more expensive for households and businesses to borrow money and thus cooling the economy. Higher interest rates are generally positive for the Mexican Peso (MXN) as they lead to higher yields, making the country a more attractive place for investors. On the contrary, lower interest rates tend to weaken MXN. The rate differential with the USD, or how the Banxico is expected to set interest rates compared with the US Federal Reserve (Fed), is a key factor.

How often does the Bank of Mexico meet during the year?

Banxico meets eight times a year, and its monetary policy is greatly influenced by decisions of the US Federal Reserve (Fed). Therefore, the central bank’s decision-making committee usually gathers a week after the Fed. In doing so, Banxico reacts and sometimes anticipates monetary policy measures set by the Federal Reserve. For example, after the Covid-19 pandemic, before the Fed raised rates, Banxico did it first in an attempt to diminish the chances of a substantial depreciation of the Mexican Peso (MXN) and to prevent capital outflows that could destabilize the country.