BNP Paribas bucks consensus, predicts Mexico’s rates will drop

By Rebecca Melvin

New York, June 28 – Contrary to consensus views that Mexico’s interest rates will remain flat near the current 7% mark going forward, BNP Paribas research has cut to 5% its already below-consensus call for rates to drop by the end of 2018, according to a note published Wednesday. It was previously predicting a decline to 6%.

BNP is penciling in steady, 25 basis point cuts at each of eight regular Mexican policy meetings during 2018.

The bank concedes risks to its view include U.S. monetary policy uncertainty, Nafta negotiations and Mexico’s 2018 elections.

“Our high-confidence, out-of-consensus view has long been that Mexican inflation would climb much higher than people expected, forcing Banxico to hike interest rates higher than markets seemed ready for,” BNP’s research team Marcelo Carvalho and Felipe Klein wrote in a note.

So far, Banxico has implemented a cumulative rate hike of 400 bps in the current cycle, and it signaled that its last raise by 25 bps to 7% last week was its last, consistent with an inflation target around 3%.

A further hike this year cannot be ruled out, BNP’s Carvalho and Klein wrote, but they expect a reversal soon.

“To forecast the policy rate in 2018 we used our 3.5% projection for inflation and assumed that 12-month-ahead expectations would converge towards target as actual inflation falls. We also used market expectations for the Fed funds rate. Our 5% forecast for Mexico’s policy rate next year would imply a real rate consistent with Banxico’s ‘neutral’ range of 1.5% to 3.0%,” according to the note.

© 2015 Prospect News.
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