Mexico: Easing cycle has further to run – BBVA

On Thursday, the Bank of Mexico cut the key interest rate by 25 basis points as expected to 4.25%. According to the Research Department at BBVA, the accompanying statement remained dovish but was more cautious, according to analysts at the BBVA Research Department. They point out Banxico’s Board remains more concerned about the economic outlook than the recent inflation rise.

Key Quotes:

“The more cautious stance is clear in the accompanying statement that added a phrase to say that the room for further easing is “narrow”. The statement also signaled that future monetary policy decisions will mainly rest on the outlook for inflation and inflation expectations.”

“The statement remained dovish and once again –correctly in our view– brushed aside the recent inflation increase (with headline inflation now at 4.1% in the first half of September and core inflation at 4.0%), signaling that the Board remains more concerned about the economic outlook than the recent inflation increase that will most likely prove temporary.”

“With inflation edging lower, we expect Banxico to cut the policy rate to 3.75% by year-end and –to avoid an unwanted tightening– to 3.0% next year.”