News | Question of the Week, WC 19th October 2020
Will Banxico cut interest rates in November?
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Question of the week: Will Banxico cut interest rates in November?
A: We look for an additional 25bp to 4.0% easing on November 11, if the economy continues to struggle and inflation dips. The major risk, however, is the MXN, and volatility potentially is around the corner, with the U.S. presidential election taking place one week before the next Banxico meeting.
Data released this week showed that the mid-month CPI rose 0.54% unadjusted in the first half of October compared to the second half of September, overshooting market expectations. Prices rose 0.40% in the same period in the last two years. Inflation rose to 4.1% year-over-year, from 3.9% in September. Inflation remains sticky, but due to temporary factors. Underlying pressures are under control, particularly in the core. We still believe inflation will start to fall over the next few months, given the deep recession and less-demanding base effects. Moreover, the MXN has performed well, despite many domestic and external challenges.
Risks to our relatively benign view for inflation remain, particularly a second Covid wave, and the U.S. presidential election, which could trigger unwelcome financial volatility. Covid cases have edging higher in recent days, rising red flags. A sustained surge in cases likely will force some cities and states to re-impose restrictions on the services economy, which has performed better in recent months as the economy reopens. If this occurs, the recent rebound in spending on services will reverse, hampering a sustained recovery in the labour market. Mexico's unemployment report, released on Wednesday, confirmed that the labour market is finally on the mend, though the details highlighted that there is a long way to recover the 4.6M jobs lost since February. The unadjusted unemployment rate fell to 5.1% in September, from 5.2% in August, beating the consensus for a modest increase. In September 2019, however, the unemployment rate was 3.8%, and it was hovering around 3% just before the Covid crisis. Labour conditions seem to be stabilising, but they are far from normal.
Overall, high unemployment and the risk of a second wave of Covid-19, which would hit incomes again, likely will mean that private consumption and investment plans will remain subdued for the foreseeable future. These forces will also keep underlying inflation pressures under control, allowing Banxico to cut rates in November. Admittedly, the bar for further rate cuts is high, as the inflation report for the first week of October overshot market expectations.
Senior LatAm Economist
Posted: 23rd Oct 2020
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