Bank of Mexico likely to continue rate cut cycle

The Mexican central bank is set to meet today for interest rate decision. According to a Commerzbank research report, Banxico is expected to continue its rate cut cycle. At currently 5.5 percent key rates continue to be very high still if one considers that the nation will slide into an even deeper recession than in 2019 this year. At 2.8 percent inflation in May continued to be below the central bank’s target of 3 percent. As a result, Banxico is expected to stick to its current course and cut key rates by a further 50 basis points again.

In its statement it is expected to once again highlight the risks it sees for inflation. Especially core inflation, which remained almost unchanged at around 3.5 percent over the past months, is causing concerns and is preventing Banxico from following the example of the numerous central banks that cut key rates much more quickly in view of the current pandemic.

It is also keeping an eye on the development of the peso. Most recently it had stabilized slightly. The central bank will not want to risk the peso coming under solid depreciation pressure as a result of significant monetary policy easing again.

“It is quite possible that the central bank will even provide an indication in its statement that it has almost reached the end of the rate cut cycle. If that were to be the case the peso might benefit. By now the key rate in Mexico is much higher than in many other emerging market countries. If that were to remain the case for the foreseeable future that is likely to support the peso and protect it against significant depreciation even in times of risk-off”, added Commerzbank.