Background and Relevance of Key Figures
The recent U.S. airstrikes on Iran have added to the geopolitical uncertainty, which analysts believe will be factored into the Bank of Mexico’s (Banxico) upcoming monetary decision on Thursday. Key figures in this discussion include Gabriela Siller, the head of economic analysis at Banco Base; Joan Domene, senior economist at Oxford Economics; and Jaime Álvarez, vice president of investments at Skandia.
Divided Votes Predicted by Analysts
According to strategists from Banco Base, Oxford Economics, and Skandia, one or two deputy governors may vote for a 25 basis points cut, while the majority will likely support a 50 basis points reduction. This division stems from differing assessments of the current economic situation and global context.
Key Factors Influencing the Decision
- Inflation: Inflation remains stubbornly high, which is a concern for Banxico.
- Economic Slack: The economy appears to have excess capacity, as suggested by the Indicador Global de la Actividad Económica (IGAE) for April.
- Geopolitical Deterioration: The worsening geopolitical situation, particularly in the Middle East, adds to the uncertainty.
More Reserved Forward Guidance Expected
Skandia’s expert anticipates that the context may lead to a more reserved forward guidance from Banxico’s members following the June decision. This reservation stems from increased geopolitical uncertainty.
Impact of the Federal Reserve’s Decision
The Fed’s recent actions will have a more significant influence on Banxico’s decision, especially considering the geopolitical uncertainties and their potential impact on oil prices.
Potential Scenarios for Interest Rate Cuts
A recent Citi survey indicated that 31 out of 33 market participants expected a 50 basis points cut, while only two anticipated a 25 basis points reduction. If Banxico implements a larger 50 basis points cut, analysts warn that they may need to revise their short-term inflation forecasts upwards, potentially leading to a pause in August and subsequent 25 basis points cuts in September, November, and December.
Additional Pressure: Underlying Inflation
Banco Base’s expert points out that inflation has risen, with goods facing upward pressure. The exchange rate remains a latent risk should geopolitical tensions escalate, causing further inflationary pressures.
Should Banxico adopt a gradual approach to future cuts, the market is likely to respond positively, potentially leading to an appreciation of the Mexican peso below 19 per US dollar.
Key Questions and Answers
- Q: How will geopolitical uncertainty affect Banxico’s decision?
A: Geopolitical uncertainty, particularly from events in the Middle East, will likely lead Banxico to consider a more cautious approach to interest rate cuts.
- Q: What factors are influencing the predicted interest rate cuts?
A: Key factors include persistent high inflation, perceived economic slack, and the deteriorating geopolitical situation.
- Q: What is the expected magnitude of the interest rate cut?
A: Analysts predict either a 25 or 50 basis points cut, with a divided vote possible among Banxico’s members.
- Q: How might the Federal Reserve’s decision impact Banxico?
A: The Fed’s recent actions, especially concerning geopolitical uncertainties and oil prices, will have a more significant influence on Banxico’s decision.
