Banxico Surprises with Hefty Rate Cut

Banxico took the market by surprise last week with a higher-than-expected 75bp cut in its monetary policy rate, which is now at 6.75%. Consensus was for a 25bp cut while some shops, such as Bulltick Capital, expected a 50bp reduction. The central bank cites the intensification of the global financial crisis, the impact of the US slowdown on the local economy and falling inflation as the reasons for the easing. Banxico says that it aims to reduce inflation to 3.00% by the end of 2010. It now stands at 5.78%. Bulltick is revising its forecast on future cuts and now sees the central bank cutting 75bp in both April and May, bringing the rate down to 5.25%. In June it foresees a 25bp drop, ending up with the rate at 5.00%. Goldman Sachs says the move, while unexpected, is positive. “The larger-than-expected cut of 75bp simply brings back the pace of rate cuts to the path of 50bp per meeting,” the shop says. It expects Banxico to make two more 50bp cuts in April and May, reducing the rate to 5.75%.