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Banorte on Banxico: Expecting 50bps Hike To 5.50% In Tough Decision

MEXICO
  • Despite being part of the minority in forecasting a 50bps hike, Banorte believe the backdrop has become more challenging in the last few weeks, which is key to explain their call of an acceleration in the tightening pace.
  • Some of the most relevant developments include: (1) An upward extension of domestic inflationary pressures; (2) the high likelihood of a faster tapering and more accelerated hiking cycle by the Fed; and (3) the recent depreciation of the exchange rate, albeit with the latter moderating in the last few days. They believe this combination of factors will validate the view of the more hawkish members on the Board about the need of a more substantial adjustment.
  • Negative factors for inflation keep accumulating, with upside risks materializing with more force each time around, and which Banorte believe will impact short-term expectations in coming surveys. This supports the hypothesis that pressures might not be as ‘transitory’ as originally thought, a situation already debated by some members in the last decision.
  • Deputy Governor Irene Espinosa took part in the podcast Norte Económico and in their opinion, had an even more hawkish stance. Specifically, they highlight her comment that “…our monetary policy should respond in an overwhelming manner to inflation levels, the persistence of inflation and to signals that we are already seeing in terms of impacts on expectations…”.
  • Following this decision, Banorte expect the tightening cycle to extend to 2022, with accumulated hikes of 125bps in said year and the rate reaching 6.75% by December. Specifically, they anticipate adjustments in February (+50bps), June (+25bps), September (+25bps), and December (+25bps). The first one would be associated mainly to local inflationary pressures and the acceleration of tapering, while the following ones would be influenced more strongly by the relative monetary stance with the Fed, considering that they expect FOMC adjustments of the same magnitude at similar dates.
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