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Our terminal policy rate forecast stands at 11.25%

Julio Ruiz


The central bank of Mexico (Banxico) released the minutes of December’s monetary policy meeting, in which most Board members voted to hike the policy rate by 50-bp to a level of 10.50%. The minutes are consistent with the forward guidance provided by the corresponding statement, suggesting that an additional rate hike (next February) is likely, but subsequently rate hikes and their magnitude will be data dependent.

Two Board members seem to have a more dovish bias, beside deputy governor Esquivel (who is no longer in the Board and is yet to be replaced) who voted for a 25-bp rate hike. One member noted that looking ahead, an ex-ante real interest rate of around 6% should be gradually reached. The same member recognized that the 600-bp rate spread between the Fed and Banxico could be marginally reduced in case inflationary cycles diverge given sound macroeconomic fundamentals in Mexico. Other member noted that, in the future, adjustments to the reference rate will have to be calibrated with caution, considering the monetary policy stance that has already been reached, its transmission mechanisms, and the lags with which monetary policy operates (although he/she suggested that some additional tightening is likely). Finally, Esquivel said that the restrictive policy stance already attained, together with easing inflationary pressures, suggests that further raising the reference rate is unnecessary.

In contrast one of the five members kept a hawkish bias, while a fifth member had a more balanced view. The hawkish member acknowledged that domestic inflationary pressures are becoming increasingly more evident, mainly those related to consumption. The same member stated that there is now a greater risk that inflation will decline faster in the U.S. than in Mexico, which could imply larger increases in Banxico’s reference rate than foreseen. The other member, with a more balanced view, noted that looking ahead, both caution and flexibility will be required to adjust the monetary policy stance and that further monetary policy tightening and the level that the reference rate reaches will be contingent on incoming data.

Our terminal policy rate forecast stands at 11.25% amid still high inflation, which would imply a 50-bp and 25-bp rate hikes in February and March. Our call is contingent on the Fed delivering rate hikes of the same magnitude. We note there is a possibility of Banxico slowing down the pace of rate hikes to 25-bp in the next meeting (even if the Fed hikes by 50-bp) and/or that the next hike is the last one of the cycle. In this context, risks for our terminal policy rate forecast are tilted to the downside.

João Pedro Resende

Julio Ruiz