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JPMorgan Take On Banxico Minutes: Predict Hiking Cycle to 5%

MEXICO
  • This week's minutes made it clear that while it was a close call given concerns about economic slack and limited guidance to the market, there were stronger arguments in favour of a tighter stance given important underlying pressures on inflation that in JPM's view, suggest markets should expect a brief hiking cycle this year to 5%.
  • Interestingly, one member that voted for a hike (most likely Governor Diaz de Leon) emphasized the importance of containing risk premium, an orderly adjustment in the term structure of interest rates, and FX fluctuations. References to the exchange rate have been scarce in the past and its explicit mention should be read in the context of forthcoming global policy challenges.
  • As underlying inflation continues to exert upward pressure to short and mid-term expectations, it is reasonable to expect the dovish members to yield soon.
  • All in all, they continue to forecast three more 25bp hikes this year (Aug, Sep, and Nov) that would bring the policy rate to 5%. In their view, the pre-emptive 25bp hike prevented more aggressive actions for the time being. Going for 50bp or more should only be considered if market dynamics deteriorate sharply, particularly the MXN, ahead of the Fed's tapering.
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