Banxico Pauses on Rates

As expected, Banxico left its monetary policy rate at 4.5% Friday. The Mexican central bank had cut the rate by 375bp since mid-January and Mexico’s economy continues to contract at an alarming pace. Credit Suisse maintains its view that no more rate cuts will materialize in the remainder of 2009. However, Banxico gave a glimpse of hope for the Mexican economy, based the expectation of a less severe contraction in 2Q, compared to 1Q. Market consensus indicates that Mexico’s GDP will have contracted 10.8% in 2Q 2009, after plunging 21.5% in the first quarter because of deterioration in industrial activity. Barclays, which agrees that there will be no more cuts this year, believes the bank will gradually normalize monetary policy in March. However, RBC expects the bank to begin raising rates in 10Q3 for a cumulative 150bp in hikes to 6.0% by end-2010. Market consensus sees the rate at 5.5% by the end of next year.