June 20, 2022 16:20 GMT
- The central bank’s May statement was more hawkish than the March one, with substantial upward revisions to inflation forecasts through the policy horizon providing clear context for upcoming rate hikes.
- The statement also emphasised the tightening monetary and financial conditions worldwide, with particular reference to the Federal Reserve’s stance. With the Federal Reserve raising the policy rate by 75bp in June, SocGen now believe that Banxico will also raise its policy rate in June by 75bp (vs prior forecast of +50bp). The Banxico officials have said they will incorporate the Fed’s stance at their June meeting, reducing the downside risk (of a 50bp rate hike).
- Given that the labour market is tightening and wages are rising, the inflation outlook remains worrisome and uncertain in the near to medium term despite an expected moderation from current levels.
- After taking into account 1) inflation numbers and outlook, 2) the Fed’s stance and 3) the advanced stage of Banxico’s tightening cycle vis-à-vis the Fed, SocGen believe that Banxico will raise the overnight rate by 50bp at each meeting in 3Q22 before reducing the pace of further tightening to +25bp each meeting in 4Q22 (taking the peak rate in this cycle to 9.25%).
- For now, domestic inflation concerns and the Fed’s stance are supportive of additional tightening. However, the real policy rate will soon turn positive, and unless the peso comes under significant pressure in the months ahead, SocGen see more downside than upside risk to their terminal policy rate forecast of 9.25% in 4Q22. The Fed’s stance will also be critical for the timing of the beginning of Banxico’s easing cycle (SGe in 4Q23).