EM Alpha: Mexico – Receive 2Y TIIE

研报英文原文证据摘录

EM Alpha: Mexico – Receive 2Y TIIE

Low-rate differentials reflect low inflation and growth differentials

Mexico’s policy rate differential versus the US – now 3% - is near its lowest level in two

decades, but so are the underlying inflation and growth differentials. As Exhibit 4 shows,

periods of narrow rate spreads have consistently coincided with relatively low inflation

and weaker economic growth compared with the US. Today is no exception. Mexico’s

headline inflation is now lower than in the US (3.4% versus 4.1%), while economic

activity has softened materially, leaving the country with one of the weakest growth

outlooks in the region – we expect 0.8% real GDP growth in 2026, and a recovery to

1.5% in 2027, still below potential in Mexico, vs 2.2% in the US for each 2026 and 2027.

Against this backdrop, there is little reason for Banxico to tighten monetary policy. With

inflation easing, the peso stable, and domestic demand weakening, the priority should

gradually shift toward supporting the economy rather than preserving wide interest rate

differentials. We therefore expect Banxico to retain a dovish bias. If the Fed stays on

hold, the next move in Mexico is more likely to be a cut than a hike. Even if the Fed

resumes tightening, Banxico would likely remain on hold. Only an aggressive Fed hiking

cycle and a materially stronger dollar would likely trigger rate hikes in Mexico. In our

view, markets are overestimating the scope for future tightening, as lower inflation and

weak growth argue for narrower – not wider – policy rate differentials versus the US.

Exhibit 4: Low-rate differentials are a consequence of low inflation and growth differentials

Monetary policy rate (MPR), inflation (CPI), and growth (GDP) differentials between Mexico and the US

MPR CPI GDP

-2

-4