Primer: Banxico rate decision due Thursday 26th March at 19:00GMT/15:00EDT
Banxico is expected to hold rates at 7% on March 26th, according to 16/28 economists surveyed by Reuters, although some see a resumption of the easing cycle. Eleven analysts expect a rate cut, while one expects a hike. Rabobank aligns with the consensus, citing recent concerns among policymakers about persistent inflation at the previous meeting, and expects the Iran war to intensify these concerns. However, it notes that worries among more dovish Board members about a deteriorating economic outlook may leave the Bank in a difficult position. Rabobank expects the next 25bps rate cut in June and says the March statement will be watched for forward guidance, particularly any signal that Banxico will "look through" war-driven inflation and focus instead on underlying domestic pressures.
Recent commentary saw Deputy Governor Heath say rates should be kept steady at the next meeting due to the situation in the Middle East and the associated inflation risks. The previous statement introduced a shift in guidance, noting it would evaluate additional reference rate adjustments, compared with earlier wording about evaluating the timing of further adjustments, signalling a pause in the easing cycle. This change in guidance, alongside heightened inflation concerns since the Iran war, is likely to keep Banxico on hold this week as it assesses developments. Other major central banks have taken a more hawkish stance in response to the war, with rate hike expectations building for the ECB and rate cut expectations for the Fed being pushed back.
Amid inflation risks linked to the war, data is likely to take a back seat in Banxico deliberations. Still, the half-month core CPI for March rose 0.22%, matching the prior pace, while the headline reading of 0.62% exceeded the 0.35% forecast, likely reflecting higher energy prices feeding through. Full February data showed headline inflation above forecasts on both M/M and Y/Y measures, while core was in line. Meanwhile, January economic activity disappointed, although retail sales beat expectations. Employment data for January rose to 2.7% from 2.4%, above the 2.6% forecast, with February data due on Friday 27th March.
At the previous meeting, Banxico kept rates unchanged at 7.00% as expected, in a unanimous decision that paused the rate-cutting cycle, in line with its assessment of the inflation outlook. It revised up inflation forecasts and now expects inflation to converge to target in Q2 2027, compared with Q3 2026 previously, reflecting a reassessment of the impact of fiscal adjustment and upward pressure on services inflation. In the near term, it forecasts Q1 2026 headline inflation at 4.0%, versus 3.7% previously, and core at 4.4%, compared with 4.0%. Looking ahead, the Governing Board said it would evaluate additional reference rate adjustments, compared with a prior commitment to assess the timing of further adjustments. Rabobank said that despite the upward revision, it still expects two further 25bps rate cuts this year starting in June, taking the terminal rate to 6.50% by end-2026, although it added this view depends on the Fed cutting rates three times this year.