- Heading into Banxico's final monetary policy decision in 2024, the probability of a 50bp rate cut is now higher although a 25 bp cut is still on the table. From a strictly fundamental perspective, the monetary stance seems overtly restrictive. Fresh inflation data released after the 14 November decision has been positive. Meanwhile, activity rebounded somewhat in 3Q24, although we still do not believe that the bounce will be sustained and that the economy will only reach a growth rate of 1.5% to 1.75% in 2024.
- Banxico's Board seems divided when looking at its latest minutes. It seems that two members (most likely Victoria Rodríguez and Omar Mejía) are willing to discuss a larger cut, but other two members seemed much more hawkish.
- We acknowledge that several risks could arise in 2025 that could lead the Board to adopt a more cautious stance, although the materialisation of these risks would not preclude the Board's continued adjustment of its move towards a more neutral rate. Because of this, an oversized cut right now does not pose an additional risk for next year.
- The markets have certainly shifted more dovish in recent weeks, although the implied expectations are still less dovish than our stance. As such, we still see value in nominal rates. In our view, the scope for further downward adjustments in the MBono spread vs. UST is still ample, as is the propensity for a steepening in local curves.
- Finally, we would expect an initial depreciation of the MXN were Banxico to deliver an oversized cut, even if only short-lived. In our view, the currency price action is no longer primarily determined by the carry trade. As such, we would expect more volatility in 2025 due to concerns over tariffs.