Bank of America Forecasts Rate Cut by Banxico

Bank of America projects that the Bank of Mexico (Banxico) will reduce its policy rate by 25 basis points, bringing it down to 10.00% at the upcoming meeting on December 19.

The financial institution anticipates a divided decision, with at least one member likely to advocate for a more aggressive 50 basis point reduction. Furthermore, Bank of America foresees new forward guidance from Banxico, suggesting the possibility of an accelerated pace of rate cuts.

Banxico previously indicated in its November forward guidance that it plans to lower rates in subsequent meetings. The rationale behind the expected rate cuts includes core inflation remaining under 4%, a sluggish economy despite unexpected growth in third-quarter GDP, and rate-cutting measures by the U.S. Federal Reserve.

Despite these factors, challenges such as headline inflation hovering around 5%, close to 5% services inflation, a tight labor market, a weakening Mexican peso, and uncertainties surrounding domestic reforms and U.S. policies under President-elect Donald Trump create a complex backdrop for monetary policy decisions.

Moreover, inflation expectations are still above the 3.0% target, which adds to the caution exercised by Banxico. With these considerations, Bank of America predicts a gradual but consistent reduction in the policy rate for the remainder of this year and into the early part of next, aiming for a rate of 8.75%.

However, there remains a risk that Banxico may opt for a more rapid pace, potentially enacting 50 basis point cuts as soon as December and possibly cutting rates more deeply than Bank of America currently expects.

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