Mexico – Playing the waiting game

Banco de México's (Banxico) is likely to leave rates at 3.0% when it meets on 4 June. No significant change in policy guidance is expected, says Stnadard Chartered. Growth has been sluggish but inflation has stayed well behaved - headline CPI is close to 3%; core rates have slipped below 2.5%. Last week, Banxico governor Carstens ruled out rate cuts in a Wall Street Journal interview, arguing that allowing inflation and the Mexican peso (MXN) to "go adrift" would bring higher interest rates later. 

Banxico board members may debate whether to pre-empt the Fed in raising rates. The cost of waiting for the Fed seems sufficiently low to make it practical as cyclical indicators are weak and currency volatility has subsided. Unless price pressures unexpectedly accelerate and the MXN depreciates significantly, Banxico can afford to wait for the Fed.