Bank of America expects Mexico's central bank to leave its policy rate unchanged at 6.50% at the June 25 meeting, with the decision rendered unanimously, according to the firm's outlook. The bank judges there is a very high probability that Banxico will hold rates at that meeting.
The bank anticipates that forward guidance from Banxico will reinforce a vigilant, data-dependent stance. That guidance is expected to emphasize that inflation remains below 4%, while pointing to economic slack and weaker-than-expected activity as reasons to maintain policy settings.
Outlook through 2026
Bank of America projects that Banxico will keep its policy rate at 6.50% through 2026. The assessment of a prolonged hold reflects several domestic factors: activity is weak, consumption and investment contracted in the first quarter, and the output gap remains negative. The Mexican peso is also judged to be relatively strong, which factors into the central bank's policy calculus.
Inflation and policy room
While inflation is reported as below 4%, Bank of America notes that it still exceeds the central bank's target. That condition means Banxico would not have room to lower rates, despite the overall weak activity backdrop.
Interaction with U.S. monetary policy
Bank of America states its house view that the Federal Reserve will raise rates three times this year. In that scenario, the firm expects Banxico would prefer to remain on hold and allow the peso to depreciate rather than follow with rate increases, given the bank's assessment of low pass-through from exchange rate movements to domestic prices.
Risks and balance
According to Bank of America, risks to their call on Banxico are balanced. The firm highlights the interplay of persistent inflation above target, a fragile domestic demand picture, and external monetary tightening as the principal uncertainties shaping the outlook.