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BBVA: Banxico Will Likely Match Fed’s Expected Rate Hikes In 2022

MEXICO
  • At the time BBVA changed their call, about three weeks ago, many other analysts also shifted their expectations for this meeting to a larger 75bp hike (22 out of 34), while markets had also priced in a 75bp move. The Banamex Survey released this week shows that now 33 out of 34 analysts are expecting this move. BBVA think that there will be a large majority for this move with Governor Victoria Rodríguez and board member Galia Borja joining Espinosa and Heath to vote for a 75bp hike.
  • There is (now) a wide consensus that Banxico will match Fed’s expected hikes through December, delivering 175bp worth of additional hikes, taking the policy rate to 9.50% by year-end.
  • Although BBVA think that both headline and core inflation likely peaked in May, they expect both to flatten out during 2Q and 3Q, before they start to show clearer signs of easing. They anticipate that Banxico will revise its headline inflation forecasts upwards, as well as its core inflation expected path.
  • Banxico will take the monetary policy rate well beyond neutral to try to influence price dynamics through two channels: inflation expectations and the ER i.e., will tighten further to avoid long-run expectations de-anchoring and to keep a wide interest rate spread. Yet, Banxico does not need to slow demand (there is still plenty of slack in the Mexican economy) and most drivers of high inflation are global and beyond its control.
  • Given that BBVA expect inflation to ease during 2023, they think that with an increasing real policy rate, Banxico will not match Fed’s expected hikes in early 2023, allowing the spread to shrink somewhat.
  • Banxico´s tightening will result in strong headwinds to the economy, something that, considering the time horizon in which monetary policy operates, will become evident next year. The wide interest rate differential vis a vis the fed funds, along with an economic slowdown and a falling inflation rate, will allow Banxico to decouple from the FED next year and to start a gradual easing cycle in the last quarter.
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