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SocGen Expect 75bp Hike and Additional Tightening Thereafter

MEXICO
  • The ex-post real overnight rate is now firmly positive, but as current and year-ahead core inflation forecasts remain well beyond the target range, the Bank of Mexico will likely maintain its pace of tightening for now. We also expect it to further revise up its medium-term inflation forecasts. A lower medium-term inflation forecast would signal that Banxico may contemplate concluding its tightening cycle soon.
  • Nevertheless, with the Fed likely to tighten further in December (and probably February too), we do not see Banxico concluding its tightening so soon.
  • As the tightening cycle is likely into its final stages, one would expect additional tightening to be increasingly driven by the Fed’s stance. Failure to adequately respond to the Fed could put pressure on the peso, making it difficult to contain price pressures. The market currently expects Fed and Banxico to tighten by 183bp and 145bp over the next two quarters, followed by rate cuts in 2H23 (likely in 4Q23).
  • In any case, until core inflation begins to subside, SocGen say it would be premature for both them and the market to expect the tightening cycle to end. Medium-term rates prospects also face upside risks from high core inflation. SocGen still expect easing to begin in 4Q23, but the rate cuts will likely follow a sluggish trajectory.
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