Mexico | Exceptional circumstances. Exceptional actions?

Summary

Banxico should speed up its slow pace of easing and implement additional liquidity measures. There is scope for both further cuts in the policy rate and implementing additional liquidity support measures.

Key points

• Key points:
• Inflation concerns are overdone and lower inflation will continue to feed into lower inflation expectations
• Banxico’s hawkish tone might have been already counterproductive in terms of inflation expectations, but it will not prevent them from declining in tandem with inflation
• Considering that expectations are and will remain well-anchored, Banxico should lose its fear of easing
• The relationship between interest rate spreads and the ER is temporarily broken and thus, if Banxico is keeping a restrictive stance and cautious stance to avoid a further MXN depreciation and/or capital outflows is in our view proving to be ineffective and costly
• A more aggressive pace of easing and an easing monetary policy stance are warranted

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