Mexico: Banxico to hold the policy rate at 7% - TDS

Analysts at TDS expect Banxico to hold the policy rate at 7% today, and indeed for the rest of this year, but acknowledge the increasing risks to the outlook due to the uncertainty over ongoing NAFTA negotiations.

Key Quotes

“The question for us is whether Banxico begins to acknowledge any potential downside growth risks, or upside risks to inflation (via FX depreciation) that could materialize in the wake of a U.S. declaration of Article 2205 (notice of intent to withdrawal). A key market risk focus from Banxico’s statement should also be the context in which policy makers consider recent MXN volatility. It would be MXN-negative in our view if Banxico begins to send a signal of concern regarding peso volatility, or elevates the importance of the policy differential between the US and Mexico (ultimately a peso-focused policy).”

“Also today we have October CPI inflation which is expected at 6.34% Y/Y, virtually unchanged from the prior. Inflation has now peaked on a Y/Y basis, not only on headline but also core, though there remains some potential for the disinflation process to be slowed by price shocks from the recent natural disasters. Inflation expectations for the medium and longer term have stabilized around 3.5%, which suggests that second round effects are well-contained for the time being.”