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  • Banxico. Rate cut on December 2nd if the exchange
    goendeavor.com | Nov 11, 2011 05:56:49
        The central bank goes strengthens its dovish tone in comparison with its august announcement. This last announcement contributed to a rate cut expectation by some analysts (19% of total) for the present meeting. In today’s statement Banxico stresses the possible convenience of a rate cut depending on the global growth and its implication on the Mexican economy.

        Banxico underlines that the exchange rate is anchored in the medium term by economic fundamentals. This along with the low exchange rate pass-through to prices allows that inflation expectations have not changes significantly, which supports the perspective of a rate cut in December.

        The current BBVA Research scenario established a protracted monetary pause with a first rate hike in 2013, biased to a rate cut in December. However, in light of the recent announcement, we change our perspective to a rate cut of 25 basis points in December with further rate cuts depending on the global scenario. Notwithstanding, there is a bias to keep the rate in 4.5% if the exchange rate volatility and levels increase to levels similar o higher to those seen during the last weeks or the US economic growth surprises to the upside. 
  • BoC Policy Monitor - Bank of Canada extends timeli
    goendeavor.com | Nov 11, 2011 05:56:41
    As expected the Bank of Canada left interest rates unchanged at 1% this morning. The BoC now sees a weaker outlook for the Canadian economy, with external forces (e.g. Europe and US problems) affecting confidence here. Asa result, it has extended by a year the timeline for the output gap to close (to end of 2013). Growth for 2011 is now expected to be 2.1% (down from 2.8% in July\\\'s MPR) and next year has been trimmed to 1.9% (from 2.6%). However, growth in 2013 has been raisedto 2.9% (from 2.1% in July\\\'s MPR). Exports are expected to remain a source of weakness due to softer foreign demand and the drag from a strong C$. So, although household spending is now expected to grow modestly as incomes and confidence take a hit (e.g. fromslumping financial markets), the BoC is counting on domestic demand (consumption and investment) to drive the economy forward. The BoC continues to expect inflation to moderate as temporary factors (food and energy) are unwound. As a result of the downgradedoutlook, the BoC has significantly revised down its inflation forecasts to 1% by the middle of next year (from 1.9% in July\\\'s MPR). While the BoC extended the timeline for the output gap to close, that doesn\\\'t mean that they are contemplating looser monetary policy. The BoC makes clear that "there is considerablemonetary policy stimulus in Canada", a statement that it omitted the last time. Note that economic growth won\\\'t be straying too far from potential of 2% this year and next, which leads us to believe that the BoC is comfortable with its current stance ofleaving interest rates unchanged for the next little while. Moreover, even if inflation has been downgraded to 1% by middle of next year, real interest rates will still be around zero under that outlook, i.e. highly stimulative. The case for some normalizationin interest rates is still appropriate.  That, in our view, suggests that rate cuts are off the table, unless the global economic environment turns sour e.g. worse than the base case scenario of the european crisis being "contained" (like the BoC, we alsoassume positive developments in the European situation which would be enough to prevent a freeze in financial markets).

    We see limited downside on inflation given limited amount of spare capacity in the Canadian economy. Moreover, the BoC\\\'s baseline scenario has upside if there is a positive developmenton fiscal policy in the US. Under our base line forecast, fiscal drag in the US is less than what the BoC assumes. That said, we don\\\'t anticipate rate hikes either for the next little while, despite higher-than-target inflation (which is arguably beingbuoyed by temporary factors) because there are just too many downside risks that threaten to derail growth. We continue to expect a resumption of rate hikes in the second half of next year.