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MNI Banxico Preview - August 2021: Pressures Remain

The governing board are expected to hike the overnight rate by another 25bps to 4.5%. Persistently high levels of headline inflation close to 6% Y/y highlight the need for further action to anchor expectations. Markets will be watching the details included within the new communications strategy spelled out at this meeting and individual MPC members' views on pipeline policy tightening.

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Executive Summary

  • Banxico's governing board are widely expected to hike the overnight rate by another 25bps to 4.5%.
  • Persistently high levels of headline inflation close to 6% Y/y highlight the need for further action to anchor expectations and bring CPI back to target.
  • Markets will be watching the details included within the new communications strategy spelled out at this meeting and individual MPC members' views on pipeline policy tightening.

Click to view the full preview: MNI Banxico Preview - August 2021.pdf

Stubborn Inflation and Advancing Expectations

CPI for the month of July rose 0.59% versus an expectation of 0.56% and a 5.3% rise in June. Annual headline inflation for July fell to 5.81% Y/y from 5.88% in June. Despite the small decline, the reading was above estimates of 5.78% and remains well above the central bank's target of 3% +/- 1 percentage point.

Additionally, the latest central bank survey indicated Mexico analysts have raised their 2021 CPI estimate to 6.00% Vs. 5.80% in the prior survey. Within the biweekly report, 27 of the 28 analysts also pencilled in the next rate move to be a 25bps hike in August.

Additional Monetary Policy Communication Announced

In a statement released on August 5th, Banxico announced two new elements of communication to be included within the monetary policy statement:

  • The central bank will now update CPI forecasts at each monetary policy decision, providing headline and core inflation forecasts for the next eight quarters.
  • Additionally, Banxico will publish governing member's votes within the statements.
  • Both changes are effective immediately and are designed to give greater clarity on the decision-making process of the Governing Board, improving transparency and communication. The updated guidance has been welcomed by analysts.

Marrkets

The front end of the TIIE swaps curve has shifted higher following the surprise hike in June. The persistence of inflationary pressures has kept upward pressure on the 3month-2year segment of the curve as markets price a greater amount of short-term tightening assuming the central bank will continue to act in an attempt to anchor expectations.

USDMXN has traded in a very narrow range since the June meeting as potential tailwinds from the pre-emptive hawkish manoeuvre have been offset by upside surprises in U.S. data contributing to the substantial progress goals of the Federal Reserve, resulting in a firmer greenback. Additionally, lingering anxieties relating to president AMLO's energy initiatives and favouring of the state-controlled utility companies underscore potential MXN headwinds. At the same time, it is worth pointing the Peso has proved resilient, outperforming regional peers since the June meeting.

MNI/Bloomberg