If the market consensus is right – in the light of the Fed’s decision not to taper and sluggish domestic growth – Mexico’s central bank is now widely expected to trim another 25 basis points from its key interest rate after its September 6 surprise cut.
The trickier question is: will it be snip, or snip, snip – one cut (to 3.5 per cent), or a cut followed by another cut on December 6?
Time for a quick straw poll: RBS says one cut only, whereas Nomura is forecasting a 60 per cent chance of a second in December. Other analysts see one cut for sure, a second maybe.
Minutes from the September 6 meeting revealed Banxico’s board was split 3-2 in favour of the September move, but the minutes’ dovish tone suggests more cuts in the pipeline.
This is a dovish board where growth concerns are at center stage. The majority of the Board considers inflation risks low and shows to be increasingly uneasy with the increasing slack in the job market. These are triggers for Banxico’s reaction function. If early Fed tapering warranted caution, this has been checked off and the dovish slant of the board is strengthened. We think Banxico cuts 25bp in October for the last time in this cycle.
It is now pretty clear that [Banxico] governor Agustin Carstens gives a low weigh to split decisions. He pulls the trigger whenever he has the votes to do so. Therefore, as long as Mr. Carstens and his flock of doves continue to think that there are conditions for additional cuts, by reading the minutes it is clear they do, the board will lower the policy rate again.
What’s the likelihood of Mexican GDP growth surging – something that could delay a rate cut? Er, not so great – especially with the economic impact of serious floods which have claimed 99 lives. Even before the hurricane and storms hit, achieving the new official 1.8 per cent growth target this year was looking difficult.
OK then – how about a 50 basis points cut? Unlikely, says Alberto Ramos at Goldman Sachs – precisely because the September cut was opposed by two Banxico directors.
Expectations are firmly there, then, for the snipping to continue. Meanwhile, all eyes on the Fed.
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