MNI Banxico Review - June 2021: Surprise Hike

Executive Summary:

• Banxico surprisingly hiked the overnight rate by 25bps to 4.25% in a split decision. The decision was contrary to all surveyed analysts who had expected rates to be left unchanged.
• Three members voted for the rate hike, with two members voting for rates to be left at 4.00%
• Banxico revised their inflation and growth forecasts higher, slightly altering their view that inflation would now converge to target in Q3 2022, rather than their previous target of Q2.
• Shocks on headline and core inflation had gone "beyond those foreseen".
• Forward guidance remained unchanged that monetary policy implementation will depend on the evolution of the factors that have an incidence on inflation.

MNI Banxico Review - June 2021.pdf

• Judging from the recent behaviour of inflation, Banxico's revised forecasts for both headline and core inflation for the coming quarters were above those published in the latest Quarterly Report. Headline inflation is now expected to converge to the 3% target during the third quarter of 2022, compared to previous predictions of the second quarter.
• The Committee introduced new language within the statement that stated shocks to prices emanating from Covid's impact on supply chains have been beyond what had been previously foreseen. While the price shocks are considered to be transitory, the majority of board members judged it appropriate to strengthen the monetary stance in order to prevent a negative impact on price formation mechanisms and inflation expectations.
• Analysts are divided over whether the pre-emptive action signals the beginning of a consistent hiking cycle to tackle inflation, or whether intermittent action will be taken to keep expectations anchored. The tone of the statement may suggest that this hike is partly an exercise in risk management and massaging expectations.
• USDMXN traded sharply lower to make fresh lows of 19.7167 and the TIIE swaps curve extended a bear flattening move with the front-end repricing roughly 40 basis points between 1-2yr.
• Forward guidance remained consistent with prior statements "that monetary policy implementation will depend on the evolution of the factors that have an incidence on inflation, on its foreseen trajectories within the forecast horizon, and on its expectations."