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Barclays: Banxico QIR – Options Open Amid Complex Outlook

MEXICO
  • Banxico maintained the inflation projections published in last February’s meeting, implying that inflation is still expected to converge towards target by Q3 2023, while noting upside risks. As expected, it revised to the downside growth for this year.
  • Banxico still expects the disinflationary process to materialize as soon as during this quarter for headline and the next one for core inflation. Barclays also expect that process to materialize but at a slower pace given recent pressures from energy prices and core persistence.
  • Banxico does not want to be tied to Fed actions, but Barclays still expect it to follow the Fed’s 25bp hikes in the next meetings: In a working paper, the central bank addressed the monetary policy cycles between the US Fed and Banxico.
  • In this context, the staff reiterates that Banxico should not always mirror the Fed’s rate actions, and that this could happen only under certain circumstances. Banxico emphasized three factors: (1) Relative inflation levels (i.e., US inflation is currently above Mexico’s inflation); (2) Mexico’s own macroeconomic fundamentals now vis-à- vis other cycles as there is a lower current account deficit, budget deficit and foreign investor holdings of local government debt; and (3) Banxico started a hiking cycle well before when the market expects the Fed to start hiking rates.
  • In Barclays view, this is just to reiterate the view that the board does not want to follow the Fed if the FOMC decides to hike in a quite aggressive way (e.g., 50bp in the seven meetings left this year), but Barclays continue to expect Banxico to follow the Fed in their current US Fed call of five 25bp hikes this year. They expect the policy rate to end this year at 7.25% and 2023 at 7.75%.
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