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MNI Banxico Preview - June 2021: Pressure Building

MNI BANXICO PREVIEW - Pressure Building

Executive Summary:

  • Banxico's governing board are likely to leave the policy rate unchanged at 4%, in a unanimous decision.
  • Recent market developments, both in domestic inflation and external conditions, may have intensified the near-term pressures to convey a more hawkish message to the markets.
  • Financial stability concerns relating to the external framework are likely to play an important role in any potential hawkish language shift within the statement.
  • Any marginal hawkish tilt likely to be tempered by patient approach.

The full preview with analyst views can be found here:

MNI Banxico Preview - June 2021.pdf

Analysts appear united that the next move for Banxico will be a hike, with the window for any further loosening of policy remaining firmly shut. Recent market developments, both in domestic inflation and external conditions, may have intensified the near-term pressures to convey a more hawkish message to the markets.

Headline May CPI dipped to 5.89% from 6.08% in April. Despite the minor slowdown in price pressure, the print remains materially above the top of the central bank's target range of 2%–4%. Core prices rose higher than expected to 0.53% in May. The latest central bank survey showed the median expectation for headline inflation at 2021 year-end rising to 5.00%, 44 basis points higher than the prior release. 2022 year-end expectations remained close to unchanged at 3.61%. For core inflation, the median expectation for year-end 2021 increased 17bp to 3.91%, and for 2022 rose 9bp to 3.60%.

Marginal Hawkish Tilt Tempered By Patient Approach: While we expect the most likely scenario to be a recognition of the persistent upward pressures of inflation, we would highlight the board's reluctance to signal any immediate shift in policy and their desire to await further data. Most recently, Deputy Governor Espinosa, taking part in a webcast, continued to suggest that inflationary pressures seem temporary, while adding that she considers most risks to the inflation outlook are to the upside. Perceived to be the most hawkish member of the governing board, her rhetoric indicates that the board requires time, still desiring to remain data dependent. However, further marginal tweaks to the language may provide the committee with a degree of flexibility if the inflation outlook were to deteriorate further.



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