Mexico: Little space for 2019 cuts from Banxico - TDS

Sacha Tihanyi, deputy head of emerging markets strategy at TD Securities, explains that the Banxico's statement has placed a substantial focus on recent developments in core and non-core inflation.

Key Quotes

“Core inflation pressures were seen as due to certain food prices as well as services which were partly bolstered by the Easter holiday. The central bank did not sound placated however by any seasonality effects, and noted that absent those effects, services prices increased. Banxico also noted an increase in inflation risk premiums embedded in financial market instruments.”

“In its risk outlook for inflation, Banxico continued to sound concerned with wage dynamics.”

“In its outlook component of the policy statement, Banxico states that it sees core and headline price increases as being transitory, and thus the current stance is viewed as consistent with convergence to target.”

“We believe it is the case that if there is any indication that great-than-productivity wage increases are having a broad impact on costs, which are then being passed on to the overall price complex (particularly services), then it is likely that Banxico could be forced into action.”

“In effect we believe that it is completely unjustified for the market to price in any potential rate cuts before the end of the year. This statement reflects hawkish concern, and while not saying that more action is coming, it for the time being closes the door on any notion that the next "certain" step in the policy rate this year is lower.”