MNI Banxico Review – February 2023: Hawkish Decoupling

Executive Summary

• Banxico's governing board decided to hike the overnight rate by 50bps to 11.00%, in a unanimous decision. The decision was above consensus, with all surveyed analysts expecting a more moderate 25bp hike.
• Commentary over recent months had been focused on whether Banxico may eventually decide to decouple from the Federal Reserve, however, most had thought this would be in a dovish direction, and thus strengthens the surprise of this decision.
• Furthermore, the board did not signal the end of the tightening cycle. On the contrary, the board suggested that at the March meeting, “the upward adjustment to the reference rate could be of lower magnitude”.
• The Mexican peso quickly became one of the strongest major currencies following the decision, with USDMXN falling around 1 percent to 18.75. The affirmation of Banxico’s hawkish stance to battle stubborn levels of core inflation increasing the attractiveness from a carry perspective which could leave the key psychological/technical support level of 18.50 vulnerable over coming sessions.
• Additionally, short end TIIE swaps sold off around 30bps, with the two-year maturity adjusting as much as +50bps in the aftermath of the decision.
• Analysts have been quick to adjust terminal rate projections, with some still forecasting the cycle end in March but others seeing not only further rate hikes this year but also the likelihood of cuts in 2023 diminishing accordingly.

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MNI Banxico Review - February 2023.pdf