Mexico: Banxico to hold rates steady next week, potential for cuts late this year –  TDS

Sacha Tihanyi, Deputy Head of Emerging Markets Strategy at TD Securities, points out they see the Bank of Mexico holding steady on rates at the August meeting, as underlying inflation dynamics continue to evolve in an unconstructive manner, in the face of non-convergent inflation expectations, driving upwards revisions to their own Mexican inflation forecast.

Key Quotes: 

“Our view on the Banxico rate trajectory has been driven by our read on inflation dynamics within the context of elevated inflation expectations. Crucial in this is the heightened impact that MXN weakness can have on Mexico's price complex in the face of unhinged inflation expectations. FX shocks within this context are more at risk of leading to "second round" inflation effects, which necessitates a careful MXN-supportive monetary policy stance until inflation expectations and core inflation normalizes.”

“We expect to see dovish tilts in the statement play out through the growth channel, and expect the board to continue to have at least one dissent for rate cuts.”

“We see the potential for cuts late this year (our call remains Q1'20), should the next two months of inflation data show core dynamics and inflation expectations better contained.”

“Yield has been absolutely invaluable to supporting MXN (as had Fed volatility suppression), and Banxico will face increasing risks to the currency the more rapidly easing is enacted, which could be challenging if the inflation metrics are not evolving constructively. The July inflation print at the least suggests that further time is required before Banxico can feel comfortable that it won't face further upside risk in the inflation outlook, which is meaningful for an inflation-targeting central bank.”