BBVA on Banxico: Expect 25bp Hike With Chance Of Larger Hike Low

BBVA on Banxico: Important For Board Not To Signal The Possibility Of Faster Pace Of Tightening

• A strong core inflation print and a further rise in 12-months ahead core inflation expectations will keep Banxico in tightening mode.
• Although short-term inflation pressures remain linked to transitory factors, namely the effects on goods prices of global supply disruptions and the effects on services prices of the continued reopening of the economy, Banxico has signalled that they will continue to pre-emptively hike the policy rate to avoid a possible increase in mid-term inflations expectations.
• BBVA expect Banxico to revise upwards its headline inflation forecasts for Q4'21 and Q1'22 and they would not be surprised if one of the hawk members vote for a larger 50bp hike.
• BBVA do not anticipate a notable revision for the following quarters and thus expect Banxico to stick to its story of inflation starting to ease in Q2 and ease sharply in H2'22.
• BBVA think that a faster pace of tightening is not warranted and would risk an unwanted excessive policy tightening in 2022. With medium-term expectations well anchored, Banxico should signal the current pace as adequate.
• Moreover, Q3 GDP contracted and there are no signs of demand-side pressures that would prove sticky. Both the economy and the labour market still have plenty of slack, and the Mexican recovery is slower than in other LatAm economies.
• Lastly, if Banxico hikes the policy rate by 25bp two more times by year-end, it will take the rate close to the neutral estimated level with the Federal Reserve about to start the liftoff in late 2022. BBVA think that is a better strategy to avoid increasing rates faster.