Mexican central bank likely to cut key interest rate by 50 bps

The Mexican central bank (Banxico) is set to meet later today for interest rate decision. According to a Commerzbank research report, the central bank is expected to lower its key interest rate by further 50 basis points.

In April, the consumer price inflation had dropped 2.2 percent, below the central bank’s inflation target. On the economic front, the economy has fallen into even deeper recession because of the corona pandemic. With regard to the economy the current 6 percent key rate seems to be too high. Even a more substantial cut would be justified.

Nevertheless, core inflation, which had come in at 3.5 percent in April and has barely fallen in recent months, is a major reason for worry for the central bank and is expected to prevent it from making a bigger cut in the interest rate. As this should be factored in, the interest rate decision should have no impact on the peso today, noted Commerzbank.

Instead, the financial markets are expected to continue to look at developments in the corona pandemic. Mexico has stated that it will be easing restrictions next week.

“On the one hand, this is good for the economy, but on the other hand there is concern that this is premature. If the pandemic in Mexico cannot be brought under control, there is a threat of renewed restrictions. With this in mind, financial markets are likely to remain nervous, and the peso will continue to trade weak against the USD”, added Commerzbank.