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JPMorgan on Banxico: Policy Rate To 7.25% By Year-End

MEXICO
  • Back in the December statement Banxico assessed both the determinants of inflation and the challenges related to tighter global financial conditions and decided to hike rates by 50bps, to 5.5%.
  • After reading Thursday’s hawkish minutes to said meeting, JPM believe the board is ready to hike another 50bps in February even if this does not mean they are changing gears from 25 to 50 for good—as they are expected to reaffirm once again that they will continue to move one step at a time, without pre-committing.
  • True, with a new governor now leading the board from January 1, the first decision in 2022 will be particularly difficult to predict, but with inflation expectations still crawling up and core inflation dynamics on a very concerning sticky path at the turn of the year, we believe the board won’t have any other option than to reaffirm its commitment with inflation targeting in an effort to strengthen its credibility, its independence, and anchor mid- and long-term expectations.
  • JPM continue to expect an uninterrupted hiking cycle in 1H22, but now expecting Banxico to bring rates to 6.75% by June, when we believe the bank will adopt the same pace as the Fed's (i.e., a hike per quarter), which should bring the policy rate to 7.25% by year-end and to 8% in 2023.
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