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Barclays on Banxico: Projected Terminal Rate Of 8.25%

MEXICO
  • Barclays expect the central bank of Mexico to hike 50bp and lift the rate to 6.50%, and then follow the Fed’s rate hikes.
  • A few weeks ago, the central bank board stated that there is no need for Banxico to mirror the US Fed’s rate actions. It stressed this again in the Quarterly Report, where it underscored that inflation in the US is now higher than in Mexico, that the US economy is growing at a higher pace, and that Mexico fundamentals are in better shape vis-à-vis other Fed hiking cycles.
  • However, Barclays’ thesis has been that Banxico will do the same as the Fed throughout this year. This would keep the spread between the fed funds and Banxico’s reference rates constant for some time, mitigating the exchange rate volatility and keeping inflation expectations anchored.
  • Barclays think this is the best Banxico can do, given the high degree of uncertainty surrounding inflation trends globally and locally, more so now that the war in Ukraine has worsened the already distorted global supply chains, boosting energy, fuel, and some other prices.
  • In this context, and right after the latest FOMC decision, their US economics team changed its call to seven 25bp hikes this year and three in 2023, from five and two hikes, respectively.
  • As a result, Barclays continue to expect Banxico to hike 50bp at its March meeting, but now believe it will hike 25bp at the following six meetings, taking the reference rate to 8.00% by year-end. However, they expect it to be able to decouple from the Fed next year after lifting the rate to 8.25%, Barclays projected terminal rate.
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