Economic Analysis - Banxico On Hold Through Year-End, New Governor To Come - JAN 2018

BMI View: Banxico ' s latest monetary policy decision supports our view that the bank will leave the benchmark rate at 7.00% through end-2017. While a new Banxico governor is increasingly unlikely to be confirmed prior to Carstens' departure in end-November, there is likely to be minimal fallout from investors.

The Banco de Mexico's (Banxico) decision to maintain the benchmark interest rate at 7.00% on November 9 was in line with our expectations and supports our view that the bank will remain on hold through year-end. The bank's communique reiterated that inflation remains in a broad downtrend after peaking in at 6.7% y-o-y in August and that it believes medium- and long-term inflation expectations are anchored following 400bps of hikes between December 2015 and June 2017.

In line with our view that growth will slow in H217 and remain moderate in 2018, Banxico also noted downside risks to Mexico's growth outlook have increased. The bank forecasts real GDP growth of 2.0-2.5% this year and 2.0-3.0% next year. The bank noted that preliminary estimates showed that growth contracted in quarter-on-quarter terms in Q317, due in part to major earthquakes in September, a drop in oil production that month and some sluggishness in export growth. Final Q317 GDP data will be released on November 24. The ongoing renegotiation of NAFTA also presents downside risks to Mexico's growth outlook, according to Banxico. This chimes with our long-held view that uncertainty over the future of NAFTA will discourage companies from making decisions on long-term investments into Mexico until renegotiations are concluded, translating into weak fixed capital formation this year and next ( see ' Muted Growth Ahead Amid Weak Investment And Services Slowdown ' , September 25). This, combined with a broad downtrend in headline inflation, informs our view for 100bps of rate cuts in 2018, bringing the benchmark rate to 6.00% ( see ' Decelerating Inflation Will Support Rate Cuts ' , October 2).

Banxico Keeping A Close Eye On MXN
Mexico - Exchange Rate, MXN/USD (Daily)
Source: Bloomberg, BMI

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