1Q26_ Quarterly Outlook Report_Final_EN - Flipbook - Page 94
T H E P LUMB LI N E | A RETU RN TO F I RS T PRI N CI PL ES
Markets and economists diverge in Banxico expectations
12%
10%
8%
6%
4%
2%
2021
2022
2023
Market-implied pricing
2024
2025
Scotiabank forecast
2026
2027
Banxico overnight rate
Source: Scotiabank Economics, Scotiabank GBM, Bloomberg, Scotia Wealth Management.
The rate trajectory that markets expect would represent a Banxico “policy mistake,” where the
bank over-adjusts to the downside and is then forced to correct with rate hikes. While this is not
our central scenario, it cannot be ruled out. Banxico’s board has shown a dovish bias that leads
us to believe that they will roll out more cuts or, at least, keeping the policy rate steady (not
hike). So, we think Banxico will ultimately continue cutting, but not that it necessarily should
given inflationary challenges; markets are taking the bet that the board will listen to the data
and drop its dovish stance. The January 1st sales tax hike on soft drinks and tobacco will keep
inflation elevated – just a few decimal points below the ceiling of Banxico’s 2%-4% target band –
and will be further pressured by planned duty increases on imports of certain key goods (e.g.,
autos, clothing, appliances) mainly targeting countries in Asia, namely China and Korea, as well
as Brazil.
It is thus possible that, after announcing two rate cuts in early 2026, Banxico will find itself in a
situation where it would be forced to do a U-turn. This would not only complicate Mexico’s
middling economic recovery directly but also breed uncertainty about how much longer rates
will remain restrictive or how many more hikes could be announced. Absent greater shocks, it is
highly unlikely that Banxico will go the way of the BCB with 450 bps in corrective hikes, but some
market participants and private-sector players may fear this is a possibility.
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