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We expect a policy terminal rate of 11.25%

Julio Ruiz


Banco de Mexico (Banxico) raised the policy rate by 50-bp in a split decision (to 10.50%), in line with our forecast and with market expectations (as per Bloomberg). Deputy governor, Gerardo Esquivel, was the dissenter voter with a 25-bp rate hike (his last meeting if AMLO doesn’t decide to reappoint him to the board). The forward guidance, in the concluding remarks had a dovish bias, as the statement now mentions “it will still be necessary to raise the reference rate in its next meeting”, while “subsequently, it will assess if the reference rate needs to be further adjusted as well as the pace of adjustments based on the prevailing conditions.” In our view, the wording suggests that an additional rate hike in the next meeting is likely but might be the last one of the cycle. More specifically, we think the next rate hike will once again match the Fed’s next move (likely 50-bps) and the next decisions will be contingent on how aligned the CPI is to expectations.

The balance of risks for inflation remains biased to the upside, although the statement recognized that some shocks show signs of subsidizing (similar as in the previous statement). Upside risks for inflation include core CPI persistence, external inflationary pressures associated to the pandemic, greater energy and agricultural pressures due to ongoing geopolitical conflict, exchange rate depreciation and cost related factors. Downside risks for inflation are 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.

Headline and core inflation forecasts increased slightly for 4Q23, while for 4Q24 both stood at target (3.0%). Quarterly annual headline and core inflation is expected to reach 4.2% in 4Q23 (from a previous estimate of 4.1%) and 4.3% (from 4.1%), respectively.

We expect a terminal policy rate in Mexico of 11.25%. Our policy terminal rate implies a hike of 50-bp in February (assuming the Fed hikes in the same magnitude) and 25-bp in March, heavily dependent on data.

Joao Pedro Resende

Julio Ruiz