**As seen in Risk In The Week report 06/22/24, subscribe at cablefxm.co.uk/reports
Back in May, Banco de Mexico (Banxico) left its policy rate unchanged at 11.0%, the decision followed the first rate cut since 2021. The central bank said that services inflation is showing to be more persistent than previously anticipated, the fresh batch of projections revised the headline and core CPI upwards over the next six quarters. One key line in Banxico's statement referred to a softer Mexican peso, which they saw as a potential risk to the upside for the inflation outlook. The landslide Morena party win was followed by a sharp 10% decline in MXN, it will be interesting to see how policymakers react to the developments. A weak peso may keep inflation projections rising and Banco de Mexico policy in restrictive territory. As of May, officials had seen 4Q 2024 headline and core CPI rising at 4.0% and 3.8%, respectively. On the growth front, INEGI reported the monthly activity indicator rising 5.42% Y/y, this was the fastest growth seen since 2022, which may disappoint those waiting for Banxico to ease soon. However, several desks have recently downgraded their Mexico growth outlook in recent weeks, the Bloomberg median survey sees GDP rising 2.1% in 2024.
A survey compiled by Citi expects consumer prices to rise 4.27% this year while analysts see the O/N rate holding steady until August. The desk at Natixis is ruling out a move in June as they noted high service inflation and the decline in the Mexican peso, they added that lowering rates would add pressure to the MXN. Natixis' base case scenario is a Banxico rate cut after September, once the Fed starts easing. On the domestic political risks, Natixis noted the first 6 Sheinbaum cabinet post announcements as positive, they added headline risks remain on the heads of CFE and Pemex. On peso depreciation, Barclays strategists see Banxico FX intervention as not enough to turn USD/MXN lower in the case of another wave of peso softness. Barclays flagged financial stability risks given the speed of the recent drop in the peso, however, they said that the real FX stabilizer would come from politicians themselves reassuring markets.
Comments