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UBS Revise 2022 Year-End Rate Forecast To 9.5% From 8.5%

MEXICO
  • As well as the well touted 75bps hike at Thursday’s meeting, UBS are also now expecting Banxico to raise interest rates to 9.5% this year, up from 8.5% previously, matching what our US economists are expecting for additional hikes in this cycle.
  • Of course, the Fed's decision to accelerate its pace of hikes to 75bps, when only weeks ago it had said that this option was not being considered, will weigh heavily on Banxico's decision-making going forward, especially as Mexican financial variables have not been immune to the Fed's more hawkish stance (the peso lost ~5.5% of its value in the run up to the Fed meeting).
  • UBS’ reasoning for having been more dovish than the market in recent months is not completely without merit. Mexico's economic recovery remains weak and the output gap is still very large; the bulk of the inflation spike has been driven by a breakdown in global supply chains and spikes in food and energy prices which monetary policy is ill-suited to address; and the peso, despite its recent weakness, has remained well-behaved and stronger than our fair value models would suggest.
  • While local inflation in Q222 is likely to come in roughly in line with Banxico's expectations, the official Q322 forecast looks increasingly optimistic on account of the persistence of food inflation despite the government's price agreements in the private sector. This makes another 75bp hike in Aug highly likely. After that, UBS would expect Banxico to roughly follow the Fed, with a 50bp hike in Sep followed by two smaller 25bp hikes in Q4, leaving the terminal rate at 9.50% this year.
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