NEWSQUAWK PRIMER: Banxico rate decision due Thursday 10th August 2023 at 20:00BST/15:00ET

Analysis details (18:00)

Banxico is widely forecast to keep rates unchanged with 11/12 analysts expecting this to be the case, although the outlier looks for a 25bp cut. The prior meeting saw the bank keep rates unchanged as expected at 11.25%, signalling that it is necessary to maintain the reference rate at the current level for an extended period. With one desk forecasting a cut, it is clearly not the consensus but, it is worth noting other LatAm central banks have already started their monetary easing cycles and at an aggressive pace. Chile cut by 100bps, 50bp larger than the consensus, while Brazil cut by 50bps, on the larger side of expectations that were mixed between 25/50bps. However, Columbia left rates on hold.

Nonetheless, the guidance from Banxico expects them to be on hold for a while; however, Banxico's Heath said that in the best-case scenario there will be a slight adjustment to interest rates at the end of the year - implying a Q4 rate cut.

The prior meeting saw the Bank revise down their headline inflation forecasts for the rest of 2023 and for Q1 2024, with inflation seen returning to target at the end of 2024/early-2025. We receive fresh inflation forecasts from Banxico on Thursday, while the latest July Inflation report saw the headline M/M in line with expectations at 0.48%, but it saw a pick up from the prior pace of 0.1%, while the Y/Y cooled to 4.79% from 5.06%. The Core M/M accelerated from 0.30% to 0.39%, beneath the 0.42% expectation while the Y/Y cooled to 6.64% from 6.89%. The cooling of the Y/Y metrics will be welcomed, but the M/M accelerations do raise some concerns. Looking ahead, analysts at Pantheon Macroeconomics beleive headline inflation will continue to ease in the next three to six months, highlighting falling underlying inflation pressures, while the solid performance of MXN recently will help. For reference, both Chile and Brazil saw negative M/M inflation prints, supporting the case for their easing, but Banxico do not appear to be in the same situation yet; although, the minutes do note the disinflationary process is underway, and reiterated guidance from the statement for rates to be on hold for an "extended period".

Recent commentary saw Heath note that rates are currently at the correct level, no matter if the Fed hikes again. With the Fed in data-dependent mode, there is the possibility of another hike, albeit markets are not pricing this to be the case and some Fed officials (such as Harker) have expressed that rates may not need to go higher, although others (such as Bowman) have implied further hikes may be likely. Nonetheless, if the Fed were to go again, Banxico seems set on keeping rates at this level, with the next move likely to be a cut. A poll of private sector analysts sees this to be the case, with Mexican interest rates expected to be at 11% by the end of the year, implying a 25bp cut in Q4.

With the central bank likely to keep rates on hold, we will be looking for any update to their guidance around keeping rates on hold for an extended period of time, or whether they start to signal rate cuts ahead. If guidance is maintained, attention will turn to the inflation forecasts to infer when rate cuts may be suitable. Analysts at Pantheon "expect Banxico to keep the main interest rate on hold at 11.25% tomorrow, but we expect the bank to ease its tone soon. We look for rate cuts in Q4". A reduction that would be in-line with the above best-case scenario outlined by Heath.

10 Aug 2023 - 18:00- Fixed IncomeData- Source: Newsquawk