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UBS on Inflation/Banxico: Forecast 50BP February Hike

MEXICO
  • UBS think the combination of continued pressure on core inflation, a hawkish Fed, and perhaps Rodriguez’s seeking to bolster her inflation-fighting credentials augur for a new 50bp hike in Feb.
  • UBS see Banxico only returning to 25bp hikes after that, moving with the Fed thereafter. They forecast the benchmark rate at 6.75% by year-end.
  • Headline inflation showed signs of moderation in December, largely because of declines in non-core prices, especially in fresh fruits and vegetables and energy. Some of these non-core components could continue to put downward pressure on inflation.
  • On both fronts, base effects should help bring inflation lower. But noncore items aside, it is difficult to see core inflation receding any time soon. UBS forecasts call for core inflation to start falling on a 12m basis in Q2’22, before ending the year at 4.3%, but they recognize that the risks to this forecast are heavily skewed to the upside.
  • The pressure on international food prices; the ongoing supply bottlenecks; and the scope for some services to play catch up as the economy reopens all signal that the surge in core inflation may be more prolonged than expected.
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