📝Banxico Needs Fed to Cut Rates to Defend Spread: ING

The Banxico differential versus the Fed funds rate is 3.7%. That’s some 100bp below the 15yr average. The all-time low was 2.9%, back in 2024 when Mexican fundamentals had been making strides towards becoming more like a developed than an emerging market. The current differential to that low is just 70bp!

It seems to us that Banxico is at a bottom right now for rates, and really needs the Fed to cut rates in order for room to open up for similar from Banxico. At a maximum, Banxico can deliver another 50bp cut without the Fed, but that is then down to the bare bone. Realistically, the Fed would need to deliver some 100bp of cuts to provide Banxico with the required degree of comfort, facilitating an end game for Banxico at 7.5%. And we still think the ultimate low if all stars align would be c.7%. Getting down there would require the Fed getting lower still. - ING