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MNI Banxico Preview - Aug 2022

MNI Banxico Preview - Aug 2022

Executive Summary:

  • Banxico are expected to raise rates by 75bps from 7.75 to 8.50% at the August meeting.
  • Ongoing pressures to headline and core inflation, rising inflation expectations and the Fed’s hawkish stance all warrant a continuation of the aggressive pace of tightening seen in recent meetings.
  • The decision is expected by all surveyed analysts and would be in line with the central bank’s most recent guidance.
  • Despite this, focus will turn to any signals within the statement regarding the depth of the current cycle and whether a hike of the same magnitude can be expected in September.

Click to view the full preview: MNI Banxico Preview - August 2022.pdf

Guidance To Provide Optionality Over Future Tightening

The August decision looks set to be a very simple one for the Banxico board. Given the ongoing pressures to the domestic inflation outlook and the Federal Reserve’s most recent 75bp hike in July, the board have little to gain by surprising markets at this juncture and should hike the overnight rate target by 75bps to 8.50%.

However, given the uncertainty regarding the Fed’s hiking trajectory and just 125bps of further tightening priced into the US curve for 2022, the Banxico statement will be eagerly analysed for potential signals over future policy steps. With the majority of analysts expecting the terminal rate somewhere between 9.00-10.00%, it is likely the statement emphasises the central bank’s data-dependent approach, providing the board with a degree of optionality heading into the September meeting.

Inflation Outlook Remains A Challenge For Central Bank Board

The headline annual rate of inflation came in at 8.15%, above the prior reading of 7.99% and breaching 8% for the first time since 2001. The data remained marginally above estimates with core readings also surprising to the upside. Additionally, there has been a further deterioration in inflation expectations. Within the latest central bank survey the median expectation for 2022 year-end inflation rose from 7.45% to 7.83%. Additionally, the forecast for year-end 2023 rose +8bp, to 4.58%, adding further evidence of de-anchored medium-term expectations.

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