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EM Central Bank Policy Update: Banxico and NBP Stay Put, Peru and CNB Cut

This week witnessed central bank meetings in Mexico, Peru, Poland, and the Czech Republic. While Banxico (Mexico's central bank) maintained its rate at 11.25% and the National Bank of Poland held its rate at 5.75%, both Peru and the Czech National Bank (CNB) reduced their policy rates by 25 basis points and 50 basis points to 6.25%, respectively. The latter's cut was more substantial than anticipated, acknowledging the sharp decline in inflation, particularly core inflation.

The key focus was on Banxico's wording, as it is the last central bank in Latin America to consider rate cuts. Following a recent uptick in Mexico's headline inflation, the consensus anticipated no change. However, the guidance was updated to indicate that future policy decisions will be made "depending on available information," according to Banxico Governor Victoria Rodriguez.

Our Take: The rate decisions this week aligned closely with expectations. Given Czechia's fragile economic situation, a more substantial rate cut was certainly within the realm of possibility. Meanwhile, Banxico distinguished itself as the last central bank in Latin America to shift towards a dovish stance, indicating a readiness to consider rate reductions. Whether it will cut rates before the Federal Reserve does remains uncertain, but the possibility is now on the table. Given the significant interest rate differential with the US, the USDMXN exchange rate should remain relatively unaffected by the pivot. Only a shift towards significant rate cuts could alter this outlook.


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