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🏦🇲🇽Cable FX Macro Weekly Note: Banxico September Rate Decision

**As seen in Risk In The Week report 09/22/23, subscribe at cablefxm.co.uk/reports

Last month, Banco de Mexico held rates at 11.25% and signaled it would need to keep policy unchanged for an extended period of time. Banxico flagged that there needs to be further progress on inflation, it said that growth risks were balanced while it warned the board's outlook is biased to an upside in inflation. On this, the central bank noted there is pressure on energy and agriculture prices, and that these could keep CPI supported. However, they also noted that the higher MXN is contributing to lower downside CPI risks. Banxico now sees inflation at 4.6% in 4Q 2023 and 3.1% in 4Q 2024. After the release, Banxico Governor Rodriguez said in a radio interview that the peso has failed to put much pressure on CPI. The MXN is among EMFX top performers this year as carry/volatility and geopolitics make the currency attractive, USD/MXN is down 13.4% YTD. Recent data showed retail sales volumes rising above estimates in July at 5.1% Y/y, while the July Economic Activity indicator dipped to 0.15% from a prior 0.48%. Both headline and core CPI have extended lower, the latter stands at 6.08% Y/y in August, this metric was rising at 8.45% in January. The jobless rate ticked higher to 3.1% in July, however, it remains below its historic average. The desk at BBVA mentioned real wages rising relative to last year, they said this is likely to keep consumerism supported into the end of the year. Analysts at UBS said that they expect the central bank to hold rates and noted that Banxico is likely to diverge from other LatAm central banks as they have started easing policy. UBS noted high core inflation keeping the central bank on watch, while the public spending proposed in the 2024 budget will probably add price pressures and delay Banxico’s easing cycle. UBS added that the MXN carry advantage is likely to stay alive as rate cut expectations are pushed forward in the calendar. A survey compiled by Citi showed analysts forecasting Banxico's first rate cut by February, they expect the policy rate to be slashed by 25bps. This will keep the cost of money above most central banks and at this pace of easing, conditions are still seen as restrictive in 2024.


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