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Investing.com -- UBS expects Banxico to cut interest rates more aggressively than market consensus, forecasting a reduction to 7.0% by the end of this year and a terminal rate of 6.5% in 2025. The bank predicts a 50-basis-point cut in June followed by 25-basis-point cuts in remaining meetings during the second half of 2023.
This dovish outlook contrasts with the broader market consensus, which anticipates rates falling only to 7.5% by year-end and a terminal rate of 6.9%. UBS attributes its forecast to Mexico’s weak economic growth outlook, particularly in domestic demand, despite inflation projections aligned with consensus at 3.9% for both headline and core inflation this year.
Some investors have expressed skepticism about UBS’s forecast, arguing Banxico would be constrained from cutting rates significantly without corresponding Federal Reserve cuts due to concerns about narrowing yield differentials between Mexico and the United States. UBS counters that such narrowing would only hinder monetary easing if it pressured the peso.
The Mexican peso has actually strengthened against the dollar since recent tariff announcements, contrary to initial expectations. UBS notes this currency strength gives Banxico more flexibility to implement rate cuts, with the central bank unusually citing currency performance in its May policy statement as partial justification for its stance on further cuts.
While some investors believe Banxico’s commitment to maintaining a restrictive monetary stance will limit rate cuts, UBS argues that with a weakening economy, widening output gap, and core inflation at or below 4%, the central bank will ultimately reduce rates to at least a neutral level.
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