Banxico prepares to cut interest by 50 bp – ING

In a highly anticipated event, Banxico meets today to set the policy rate. The vast majority of economists favor a 25bp cut, taking the policy rate to 10.50%. However, financial markets are pricing in a 50% chance of a 50bp rate cut, notes ING FX analyst Chris Turner.

50% chance of a 50bp rate cut

“The thinking here is that Banxico, like the Fed, could offer a big precautionary taper now that it has moved away from inflation and addressed growth concerns. Additionally, some see this as a window of opportunity for a large cut before the US election, and an uncertain future for trade policy closes the window for such a large cut later this year.”

“At the same time, the peso remains vulnerable to the political story. After securing judicial reforms, the government is trying to push a big increase in the minimum wage through Congress. On the former, rating agency Moody’s now says the constitutional reforms could have a direct impact on Mexico’s sovereign credit rating. Moody’s currently has Mexico at Baa2, (S&P at BBB) and Mexico’s five-year CDS at 120bps is already trading for a one-notch downgrade.”

“We think Banxico could risk a 50bp rate cut today to quickly reduce high real rates. However, the peso would suffer and our short-term trend for USD/MXN is 19.75 and above 20.00 should a 50bp cut be delivered today.”