Banxico to resume easing in 2021, greater confidence in MXN – TDS

Banxico's Governing Board held the overnight rate at 4.25%, but with two dissents for a 25bp cut. In addition, signals from Banxico's statement regarding greater confidence in MXN, as it relates to inflation, further indicate increased monetary easing flexibility, economists at TD Securities inform.

The peso slightly appreciated after the announcement but the souring market mood has provoked a greenback’s comeback, which leaves the USD/MXN pair trading around 19.90, up 0.4% on the day, as of writing.   

Key quotes

“Banxico's election to hold on rates, but with two dissents for a 25bp cut, was inherently dovish, particularly when considering that ex-Finance Ministry treasurer Galia Borja is set to replace the outgoing (and hawkish) Javier Guzman as Deputy Governor. Signals in Banxico's statement suggest greater confidence in MXN performance, as it relates to inflation, indicating increased monetary easing flexibility.”

“Greater FX appreciation was seen as a new (third of three risks) downside risk to the inflation forecast, while "episodes of foreign exchange depreciation" was downgraded as an upside risk to inflation, from the first main risk (of three) to the second. This shift on USD/MXN in the balance of risks to inflation suggests greater confidence from Banxico, relative to previous meetings, in the peso's trajectory. This in turn implies increased policy room to maneuver towards lower rates in the new year.”

“We now forecast Banxico to resume easing, beginning with a 25bp cut to the policy rate at the February meeting, followed by a further 25bp cut at the March meeting.” 

“We still view the risk bias to be tilted towards additional easing but will wait to see how communication and the USD/MXN market evolves. This includes communication regarding base effects from 2020 that should temporarily bolster year-on-year headline inflation dynamics during the first half of 2021.”