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    Mexico Rate Cut – To Be or Not To Be?

    Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
    February 11, 2021

    The consensus sees room for a rate cut in Mexico later today, despite re-accelerating inflation. Brazil formally approves the central bank’s autonomy.

    That is the question. Mexico’s macroeconomic backdrop is not the most straightforward. Domestic activity is soft (especially when compared to emerging markets (EM) peers), but inflation is sticky (close to the upper end of the target range and re-accelerating). The consensus believes there is room for a small 25bps cut―we’ll find out in the afternoon. In the meantime, the Mexican peso joined other EM currencies to celebrate a promise made by U.S. Federal Reserve (Fed) Chair Jerome Powell to keep the proverbial policy punchbowl on the table for the foreseeable future (see chart below). 

    The Brazilian central bank is officially independent (finally, after 30 years of back and forth). The bill on the central bank’s autonomy was approved by 339 votes against 114, and it is an important building block of the country’s institutional framework. The strong vote also sends a positive signal about the government’s ability to push its reform agenda through the parliament in the coming months.

    Higher inflation in the Philippines = more policy caution. But no rate hike yet. Even though the central bank noted supply-side price pressures, its current assessment is that they are transitory and that inflation will return to the target range over the policy horizon. The virus’s winter resurgence and its impact on domestic activity is another legitimate reason not to rush policy tightening―the view that is shared by many EM central banks.

    Charts at a Glance: U.S. Fed to EM FX – Party On, Wayne!

    Charts at a Glance: U.S. Fed to EM FX – Party On, Wayne!

    Source: Bloomberg LP


    PMI – Purchasing Managers’ Index: economic indicators derived from monthly surveys of private sector companies; ISM – Institute for Supply Management PMI: ISM releases an index based on more than 400 purchasing and supply managers surveys; both in the manufacturing and non-manufacturing industries; CPI – Consumer Price Index: an index of the variation in prices paid by typical consumers for retail goods and other items; PPI – Producer Price Index: a family of indexes that measures the average change in selling prices received by domestic producers of goods and services over time; PCE inflation – Personal Consumption Expenditures Price Index: one measure of U.S. inflation, tracking the change in prices of goods and services purchased by consumers throughout the economy; MSCI – Morgan Stanley Capital International: an American provider of equity, fixed income, hedge fund stock market indexes, and equity portfolio analysis tools; VIX – CBOE Volatility Index: an index created by the Chicago Board Options Exchange (CBOE), which shows the market's expectation of 30-day volatility. It is constructed using the implied volatilities on S&P 500 index options.; GBI-EM – JP Morgan’s Government Bond Index – Emerging Markets: comprehensive emerging market debt benchmarks that track local currency bonds issued by Emerging market governments.; EMBI – JP Morgan’s Emerging Market Bond Index: JP Morgan's index of dollar-denominated sovereign bonds issued by a selection of emerging market countries; EMBIG - JP Morgan’s Emerging Market Bond Index Global: tracks total returns for traded external debt instruments in emerging markets.

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  • Authored by

    Natalia Gurushina
    Chief Economist, Emerging Markets Fixed Income Strategy

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