Banco de Mexico (Banxico) raised the policy rate by 50-bp in a unanimous decision (to 11.00%), above both our forecast of 10.75% and market expectations (as per Bloomberg). Overall, the statement had a hawkish tone. It noted, in particular, the recent dynamics of core inflation, while also signaling at least one further rate hike: “depending on the evolution of incoming data, for its next policy meeting, the upward adjustment could be of a lower magnitude”. In the previous decision, the board had suggested the February hike could be the last one in the cycle.
Headline and core inflation forecasts increased (in a larger magnitude in shorter horizons), given a slower than foreseen disinflationary process. Quarterly annual headline and core inflation are expected to reach 4.9% in 4Q23 (from a previous estimate of 4.2%) and 5.0% (from 4.3%), respectively. Both, headline and core inflation increased slightly to 3.1% in 4Q24 (from 3.0%).
The balance of risks for inflation remains biased to the upside. In the upside risks for inflation list, the Chinese reopening was added, besides core CPI persistence, pressures on energy or on agricultural and livestock prices; exchange rate depreciation and cost related pressures. Downside risks for inflation remained unchanged (relative to the previous statement): greater than anticipated slowdown in the world economy, decline in the intensity of geopolitical conflicts, a better functioning of supply chains, a lower pass-through effect from some cost-related pressures and a larger than anticipated effect from AMLO’s plan to tame inflationary pressures.
We now expect a terminal policy rate of 11.50% (previously we expected it at 11.00%). Our new forecast implies two more 25-bp rate hikes (March and May) or a 50-bp rate hike (in March). We think that the magnitude of the next rate hike will be dependent, particularly, on the evolution of core inflation, which the statement emphasized. Looking ahead, we think that the central bank will only start cutting rates during the first half of next year.
Joao Pedro Resende