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JPMorgan Forecast Policy Rate At 11.25% Until Early 2024

  • JPMorgan expected a more neutral-to-hawkish tone given sticky core inflation—notably services—and broad demand-side pressures on inflation. To this point, the ongoing strength in labor markets was mentioned; that and the uncomfortable truth about core services were probably the only hawkish contributions.
  • To understand what follows for Banxico, however, it is paramount to understand two things. First, that the Board changed its guidance, removing the reference to future hikes, and second, that it underscored that the monetary policy stance is now aligned with the path required to reach its target at the end of 2024. Hence, JPM no longer foresee rate hikes this year with the policy rate at 11.25% until early 2024.
  • For this view to be right, inflation needs to deliver news that aligns with the news from February and early March, when non-core inflation came in markedly below expectations (as emphasized by the board) and core goods signaled an important correction. Still, a correction in core services remains to be seen. Next week’s March CPI and April gauges will be closely monitored not only to understand if indeed no further hikes are needed, but also in terms of how long the on-hold stance would last.
  • But it seems that a “high for long” stance is losing some steam and will depend on the correction in expectations, further financial stress in global markets, and the risk of a sudden slump in economic conditions from 2H23 onwards. If the Fed also stays on hold in May, that will make things easier for Banxico even if the board has underscored that it does not act in lockstep with the Fed.
  • JPMorgan expect the first cut in early 2024, but they are now eying a 25bp cut in February, at the first meeting next year, with rates reaching 8.75% by the end of 2024.

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