Key Moments
- Banxico reduced its policy rate to 6.25% in a 3-2 decision, unexpectedly narrowing the Banxico-Fed spread to 225bp.
- The central bank is prioritizing weak Mexican growth and a negative output gap over concerns about Peso-driven inflation.
- Analyst Chris Turner at ING sees the Peso as increasingly vulnerable, with USD/MXN moving above 19 considered more likely than not.
Banxico’s Policy Shift and Rate Differential
Chris Turner at ING draws attention to Banxico’s unexpected decision to lower its policy rate to 6.25% following a closely split 3-2 vote. According to Turner, this action compresses the interest rate gap between Banxico and the Federal Reserve to 225bp, which he describes as the narrowest such spread seen in decades.
| Policy Detail | Current Level / Description |
|---|---|
| Banxico policy rate | 6.25% |
| Banxico-Fed policy spread | 225bp (lowest in decades) |
| Banxico rate decision vote | 3-2 in favor of a cut |
Growth Concerns Over Currency Risks
Turner notes that Banxico is centering its strategy on signs of subdued economic performance in Mexico and the presence of a negative output gap. He emphasizes that the central bank is showing limited concern that Peso weakness could translate into higher consumer prices, based on its assessment that pricing power in the consumer sector is very weak.
He highlights that this stance differentiates Banxico from many other central banks that are tightening policy in response to inflation pressures, remarking that,
“Banxico is clearly focused on weak growth in Mexico and the negative output gap. It is not worried about the weaker peso contributing to higher inflation, given its view that pricing power for the consumer sector is very weak.”
Peso Vulnerability and USD/MXN Outlook
Against a backdrop where many monetary authorities are raising rates, Turner underscores how Banxico’s approach stands out. He states,
“In a world where central banks are tightening to ride out the inflation hump, Banxico really stands out now.”
Turner argues that the current policy configuration heightens the Mexican Peso’s sensitivity to changes in external risk sentiment. He warns that this environment increases the likelihood of further Peso depreciation, observing that,
“Its position leaves the peso very vulnerable to any pick-up in external risk and USD/MXN pushing above 19 seems more likely than not.”
Summarizing Banxico’s apparent tolerance for currency weakness, Turner concludes: “Banxico happy to let the peso drop.”
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