Bank of Mexico (Banco de Mexico, BOM) preview:
2024-06-27
■ BOM will likely maintain the policy interest rate at 11.00%, continuing the policy decision made in May.
■ BOM will closely monitor (1) inflation and (2) exchange rate trends, but it is not ruled out that interest rate cuts may be made based on data.
The Bank of Mexico will announce the results of its financial policy meeting on June 27th local time. After a rate cut in March, BOM temporarily maintained the policy interest rate at 11.00% in May. Market expectations indicate that the BOM for this meeting will likely again decide to maintain policy interest rates unchanged.
The main background for BOM's cautious attitude towards further interest rate cuts is twofold: (1) the existence of inflationary pressure and (2) the instability of the Mexican peso. Regarding inflation (1), although the Consumer Price Index (CPI) increased by 4.65% year-on-year in April, the composite index in May showed a year-on-year increase of 4.69%, showing stable but slightly higher performance. BOM raised its inflation expectations for the next six quarters at the policy meeting in May and raised its inflation expectations for the current year to 4.0% in the quarterly report on May 29th, which is somewhat in line with expectations. BOM may continue to monitor whether CPI will approach or exceed its target upper limit of 2-4% as a consideration factor in deciding to further lower interest rates.
(2) Regarding politics, the left-wing ruling party MORENA won significantly in the presidential and parliamentary elections on June 2nd. Despite failing to secure two-thirds of the seats in the House of Commons, market concerns over current President Lopez Obrador’s proposed constitutional reforms and increased fiscal spending have intensified, leading to a more than 10% drop in the peso's closing price against the US dollar and yen at the end of May. However, since mid-June, the Mexican Central Bank governor, Rodriguez, has hinted at possible currency intervention, and incoming President Sheinbaum has successfully pushed for cabinet appointments, causing the peso to rebound more than 5% from its lowest point in early June. Despite the political uncertainties, this peso's resilience supports the market's view that BOM will maintain policy interest rates unchanged.
In addition, according to data from the US Commodity Futures Trading Commission (CFTC), data reflecting the trading of some speculators in the non-commercial sector shows that as of June 18th, the net long position of the peso has decreased to around 50000 since November last year. Peso holders may have reduced their arbitrage trading, indicating a slowdown in short-term market sentiment. The future market will continue to pay attention to the impact of factors such as the convening of the new parliament in September, the inauguration of the new president in October, and the progress of constitutional reform during this period on the peso exchange rate. On the other hand, due to the strong US economy, Mexico may continue to benefit from the " nearshore production trend, " indicating that the fundamentals of the Mexican economic environment have not changed. Therefore, it is expected that BOM will maintain its policy stance of "selecting interest rate cuts based on data."
■ BOM will closely monitor (1) inflation and (2) exchange rate trends, but it is not ruled out that interest rate cuts may be made based on data.
The Bank of Mexico will announce the results of its financial policy meeting on June 27th local time. After a rate cut in March, BOM temporarily maintained the policy interest rate at 11.00% in May. Market expectations indicate that the BOM for this meeting will likely again decide to maintain policy interest rates unchanged.
The main background for BOM's cautious attitude towards further interest rate cuts is twofold: (1) the existence of inflationary pressure and (2) the instability of the Mexican peso. Regarding inflation (1), although the Consumer Price Index (CPI) increased by 4.65% year-on-year in April, the composite index in May showed a year-on-year increase of 4.69%, showing stable but slightly higher performance. BOM raised its inflation expectations for the next six quarters at the policy meeting in May and raised its inflation expectations for the current year to 4.0% in the quarterly report on May 29th, which is somewhat in line with expectations. BOM may continue to monitor whether CPI will approach or exceed its target upper limit of 2-4% as a consideration factor in deciding to further lower interest rates.
(2) Regarding politics, the left-wing ruling party MORENA won significantly in the presidential and parliamentary elections on June 2nd. Despite failing to secure two-thirds of the seats in the House of Commons, market concerns over current President Lopez Obrador’s proposed constitutional reforms and increased fiscal spending have intensified, leading to a more than 10% drop in the peso's closing price against the US dollar and yen at the end of May. However, since mid-June, the Mexican Central Bank governor, Rodriguez, has hinted at possible currency intervention, and incoming President Sheinbaum has successfully pushed for cabinet appointments, causing the peso to rebound more than 5% from its lowest point in early June. Despite the political uncertainties, this peso's resilience supports the market's view that BOM will maintain policy interest rates unchanged.
In addition, according to data from the US Commodity Futures Trading Commission (CFTC), data reflecting the trading of some speculators in the non-commercial sector shows that as of June 18th, the net long position of the peso has decreased to around 50000 since November last year. Peso holders may have reduced their arbitrage trading, indicating a slowdown in short-term market sentiment. The future market will continue to pay attention to the impact of factors such as the convening of the new parliament in September, the inauguration of the new president in October, and the progress of constitutional reform during this period on the peso exchange rate. On the other hand, due to the strong US economy, Mexico may continue to benefit from the " nearshore production trend, " indicating that the fundamentals of the Mexican economic environment have not changed. Therefore, it is expected that BOM will maintain its policy stance of "selecting interest rate cuts based on data."