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BBVA Say All Eyes On Tightening Cycle End Hints

MEXICO
  • Signs of a policy shift to a slower pace of hikes are possible but probably still unlikely, thus, all eyes will be on hints of what Banxico will be looking for in the data to slow the tightening pace and then end the cycle.
  • Core inflation has not yet started to soften and edged up in October. However, Banxico should take comfort that all the other core inflation components, aside from core food goods have stabilized.
  • With inflation set to soften ahead, the monetary policy stance will become much more restrictive fast. In BBVA’s view, Banxico should start decoupling from upcoming fed funds rate hikes (likely worth an additional 100bp). If Banxico matches future expected fed funds rate hikes, the real ex-ante would soar to 7.00%, an excessively tight stance in a context of waning demand and easing inflationary pressures.
  • Given that Banxico has yet to show that it is willing to let the interest rate spread narrow somewhat in the short term, BBVA think that the end of the tightening cycle is getting closer but that there is still additional tightening in the pipeline. In December, BBVA still expect them to match the Fed with a 50bp or 75bp hike.
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