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Banorte on Banxico: Reference Rate To Close 2022 At 7.25%

MEXICO
  • Banorte expect a 50bps hike, taking the reference rate to 6.00%, which is now the consensus view. This will also be a particularly interesting decision, as it will be the first one for the new Governor, Victoria Rodríguez. Their call for another hike of this magnitude is based on several factors, including: (1) An additional move higher in annual core inflation, despite a moderation in the headline; (2) a more hawkish tone from the Fed in its latest policy decision; and (3) the need to maintain a prudent stance. As such, a hawkish bias will likely prevail, even with the near certainty of a split decision happening once again.
  • On inflation, the 1H-January was quite telling to Banorte about prevailing dynamics, especially the upward surprise at the core. Since early 2021, only one print has been lower relative to expectations (see chart below on the left). Although mainly driven by goods –likely on cost pressures, among other factors–, services have been trending up recently. In their view, this remains as the main challenge for the Board. In theory, policy actions should have more influence at the core component. Hence, these trends likely signal that more tightening is necessary, especially on potentially more supply issues because of ‘Omicron’.
  • On inflation forecasts, the average for the headline in 4Q21 was 7.0%, lower than the 7.1% expected by the central bank. The core was in line at 5.6%. Considering this, revisions might be more modest than in previous decisions. Nevertheless, these could still be higher as we believe overall risks remain skewed to the upside. All in all, these updates, as well as the view on the balance of risks, will be important to assess the possible magnitude of rate hikes going forward.
  • Signals on economic activity have been negative, a situation that may bolster the doves’ arguments. This is especially true after the second sequential contraction in GDP as of 4Q21.
  • Following this decision, Banorte expect the tightening cycle to continue. Given the latest developments, they have recalibrated their forecast, now expecting five more hikes of 25bps each in March, May, June, September, and December. This would follow adjustments in the same magnitude by the Fed. As such, the reference rate would close 2022 at 7.25%, an accumulated increase of 175bps relative to YE21.
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