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Bank of America on Banxico

MEXICO
  • Banxico remains with a monetary stance below the neutral rate while inflation continues skyrocketing. Moreover, Banxico faces a difficult situation with a weak economy and ample slack in the labor market. But after last week’s hawkish surprise BofA change their call for Banxico.
  • They now expect Banxico to do two more consecutive 50bp hikes followed by two 25bp hikes in non-consecutive meetings to put the overnight rate at 7.0% by end 2022 (previous call had consecutive 25bp hikes to get to 6.50%). The change also incorporates the new US call for the Fed: liftoff in March and then one hike per quarter.
  • Uncertainty remains high - Inflation has been surprising to the upside and we all have been chasing it. And Banxico's preferences have been changing over time, in part due to the changing composition of the board. We may still get more surprises by Banxico down the road.
  • Banxico's hawkish turn increases the chance of another 50bp hike in February but: (1) there is no forward guidance; (2) Banxico omitted the word transitory on its assessment of inflation risks, but used the words "on this occasion" when announcing the 50bp hike; (3) inflation may have peaked in 2H November; and (4) there will be a new governor, Victoria Rodriguez, starting in January.
  • Therefore the risk in the short term is that Banxico goes back to a 25bp pace in February. The risk to their call in the medium term is to the upside, as Fed hikes, upside inflation risks and potential risks of a weaker currency could push Banxico to hike more than what BofA currently expect.
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