Mexico – MXN Rally Allows Cuts

We believe Banxico will likely cut its key rate by 25bps to 10.50% on September 26th, after cuts in August and March. However, Banxico may deviate from a path of further cuts if the MXN depreciates significantly. There is no doubt that Mexico's monetary policy has been in restrictive territory for the past two years . At 7.1%, the ex-ante real interest rate is well above the upper bound of the Banxico's neutral range of 1.8-3.6%. In our view, enough progress has been made on core inflation to allow the easing cycle to continue . This, in addition to the Fed starting its own easing cycle and the recent economic slowdown, opens the door for Banxico to cut. However, in subsequent policy rate meetings, Banxico's plan to lower the rate back to neutrality may face landmines in the form of sudden MXN depreciation, sticky core services inflation, and unanchored inflation expectations.