Mexico: Another rate hike this week - ING

In view of Gustavo Rangel, Research Analyst at ING, Mexico’s central bank (Banxico) should continue to diverge from the other regional central banks and extend the rate hiking cycle with another 25bp hike today, bringing the policy rate to 7.5%.

Key Quotes

“This would be in line with the more hawkish policy guidance adopted ahead of the December meeting, which marked the resumption of the hiking cycle and concluded with the dissenting opinion from a board member that voted for a larger 50bp rate increase. Authorities justified their decision by highlighting the persistent inflation challenges resulting from the price shocks seen throughout 2017, along with the highly uncertain backdrop for 2018, marked by NAFTA negotiations and local elections.”

“But perhaps the primary reason to follow through with a hike this week, which would be the first time since May that a Banxico hike does not coincide with a Fed hike, is the recent rise in inflation expectations. In particular, Banxico's own survey showed that market expectations for 2018 inflation are no longer anchored, having risen over the past couple of months to 4.1%, ie, above the targeted range. This marks an important contrast with the official central bank view that inflation will end 2018 near 3%; and should leave Banxico no choice but to match market expectations and hike this week.”

“Inflation data for January, to be announced hours before the meeting, is unlikely to impact the central bank's decision this week, but it should help guide market expectations for future policy decisions. The release should confirm a sharp drop in the yearly CPI rate, thanks to the favourable base-effect resulting from the one-off fuel price adjustment in January 2017. As a result, in YoY terms, inflation should fall about 1.2ppts, from 6.8% in December to 5.6% in January.”

“FX and the FOMC decisions are key drivers for future rate decisions

Apart from near-term inflation data, FX and US Fed decisions also rank very high in Banxico’s decision-making process, and should remain critical factors that will help determine if the bank will follow through with additional hikes in its upcoming meetings, scheduled for April 12, May 17 and June 21. In particular, the higher risk of a more frontloaded monetary normalization in the US has added material upside risk to the near-term policy-rate trajectory in Mexico.”