MXN: Base effect in the headline rate, interest rate cuts likely to slow down - Commerzbank

Last week, Mexico once again reaped the benefits of the strong relationship between its president and the US president, resulting in a further 90-day postponement of higher reciprocal tariffs. While this does not mean that the issues in the negotiations have been resolved, the strong relationship between the two leaders offers hope that progress will be made in the coming weeks, Commerzbank's FX analyst Michael Pfister notes.

Rate decision is unlikely to impact the Peso significantly

"Today, the focus of attention for the Mexican Peso is likely to be domestic factors. The inflation figures for July will be the first thing to be considered. The headline year-on-year rate is expected to drop significantly, bringing it closer to the 3% inflation target. However, this is due to a base effect."

"In July last year, seasonally adjusted prices rose by almost 0.95% month-on-month, and this increase will drop out of the year-on-year comparison. The actual new price increase is unlikely to signal the all-clear yet. In recent months, we have seen higher price increases in the core rate again (see the red dots in the chart below), and if the Bloomberg consensus is correct, the July figure is likely to be only slightly lower."

"For today's Banxico meeting, this means that, following four bigger interest rate cuts of 50 basis points, policymakers are likely to deliver a smaller cut of 25 basis points. The real interest rate is no longer as restrictive as it was a few months ago, and the renewed postponement of reciprocal tariffs gives Banxico the opportunity to slow down the pace. However, as this is expected by the overwhelming majority of analysts, the decision is unlikely to impact the Peso significantly."