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BBVA Following Last Week’s Banxico Decision

MEXICO
  • With high odds that the Fed will repeat the 75bp hike in July, BBVA continue to expect Banxico to repeat the 75bp move at its next meeting in August. They believe the Fed will then shift to a smaller 50bp hike in September, and will follow with two 25bp in November and December.
  • After the June decision, the strong negative inflation surprise, and the Board’s hint that it does not plan to further up the tightening pace, BBVA continue to think that Banxico will match the 175bp worth of additional hikes that the Fed will likely deliver by year-end.
  • Therefore, they continue to expect Banxico to take the policy rate to a terminal level of 9.50%, given that their expectation is that inflation will start to ease in 4Q22 and the economy will continue to show plenty of slack. Banxico will stop following the Fed in early 2023 if it keeps up increasing the fed funds rate by then.
  • In their view, for coming meetings it would be useful for markets and analysts to get a better understanding of Banxico’s goals with its policy tightening. Forward guidance as to what specifically it is aiming for with the current tightening pace and what signals is looking for before it shifts to smaller hikes and/or before the cycle comes to an end would be very useful.
  • The Fed has acknowledged that a lot is beyond the influence of its tools but also signalled that it is trying to slow demand (demand is much stronger in the US and its demand could have an influence on global imbalances) and avoid a de-anchoring of long-run inflation expectations.
  • There is no pressing need for Banxico to slow domestic demand, which is weak and likely to weaken further with increasing headwinds. Are hikes only objective to anchor expectations? Is avoiding the Mexican peso from depreciating another goal? What signal will mark a shift? What have the 375bp worth of hikes during this cycle attained so far?
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