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BBVA: Core Inflation Pressures Will Remain Focus For Banxico

MEXICO
  • Banxico’s concerns on inflation likely did not ease since the December meeting. Even if there are signs that headline inflation has peaked, core inflation remains in an upward trend.
  • In the second half of 2022, the Y/y rate of the trimmed mean core inflation measure surged and reached 4.4% by year-end. This trend points to signs of second-round effects considering that the supercore measure responds largely to the slack of the economy (there is still plenty of it).
  • For this reason, BBVA think that Banxico will remain impatient with core inflation’s different measures and recent trends, and despite the softness of the economy – will lean to another 50bp rate hike, taking the policy rate to 6.00%. That is, they don’t think that the economic slowdown will give Banxico second thoughts for this policy decision. This especially considering that Banxico´s reaction function has been much more sensitive to observed, rather than expected, inflation.
  • Looking ahead, BBVA expect Banxico to raise the policy rate to 7.00% by year-end as both headline and core inflation remain above 4.0% throughout 2022. Yet, they think that this week’s hike will be the last of 50bp and the central bank will return to a more gradual approach after this week’s expected 50bp hike, as core inflation starts to ease in the second quarter, in a context of a weak economy and a monetary policy rate that will reach restrictive territory.
  • The inflation rate will decrease regardless of Banxico´s actions, as the current inflationary episode is largely explained by supply and external factors, and monetary policy is not well suited to tackle them.
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