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Finamex Expect A Multi-Publicized 75bps Rate Hike

MEXICO
  • Finamex expect Banxico to hike by 75bps to 7.75%, in what could be a unanimous decision. They also anticipate the accompanying communiqué will maintain its hawkish tone and continue to signal the Central Bank remains ready to act forcefully if warranted by incoming data.
  • Inflationary surprises reduced since the last monetary policy decision in May 12. Nevertheless, latest core inflation readouts have lingered significantly above historical standards. According to Finamex analysis, the weighted share of prices growing at rates of 5% and above within the latter group represent more than 60% of the corresponding basket –the largest level in more than a decade. Recent dynamics of the core component have prevented annual headline inflation to go down despite the downward trend observed in the non-core component due in part to favourable base effects.
  • 12-month-ahead inflation expectations stabilised thus leaving conditions set for a one-on-one adjustment of nominal and real ex-ante interest rates – i.e. if the 75bp hike is delivered, the real ex-ante rate would go up from around 2.3% to 3.0%, closer to restrictive domain..
  • Since the May meeting, an increasingly complex environment more than justifies what has now become a multi-publicized 75-bp rate hike. Recent actions by the Fed have put the last nail in the coffin and left some wondering whether we could see a push towards a 100-bp rate hike.
  • However, Finamex do not believe the committees aim for a restrictive stance entails opening that door for various reasons. Financial conditions may very well continue to tighten amid a heightened uncertain environment thus triggering continuous risk-on risk-off episodes that would affect emerging market economies at large, but probably leave Mexico relatively better positioned that most of its peers for the time being.
  • Frontloading the Bank’s bullets at a more accelerated pace poses the risk of reaching double digit interest rates, that we believe will not prove that efficient to make inflation go back to the 3% target by Q1-2024.
  • Unless long-run inflation expectations continue to deteriorate without respite, being that due to a sharp depreciation of the FX and/or the incessant increase in core inflation, Banxico will follow the Fed in the coming months. This strategy would lead the reference rate to 9.50% by the end of 2022, level which Finamex expect to remain for a prolonged period, maintaining interest rate spreads stable at around 600-625 bps.
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