The Central Bank of Mexico (Banxico) published its quarterly inflation report for 3Q22, emphasizing, as the most recent monetary statement, that the magnitude of future rate hikes will be dependent on the prevailing conditions.
The central bank is more positive on activity. GDP growth forecast for 2022 and 2023 increased to 3.0% (previously at 2.2%) and 1.8% (from 1.6%), respectively. The upward revision in 2022 reflects a stronger than expected activity in 3Q22, which increases the statistical carryover for 2023. However, the report noted a worse external scenario will likely curb activity growth next year.
The report recognized certain mitigation of risks that affect inflation at the margin, but high inflationary pressures remain. The balance of risk for inflation remained tilted to the upside. While the report noted long-term headline inflation expectations (average of 5-8 years) increased in a lower magnitude than short-term measures, its distribution is biased towards higher inflation than the median. We also note the report kept the same inflation projections compared to the most recent statement, reaching 8.3% yoy and 4.1% in 4Q22 and 4Q23, respectively.
We expect Banxico to slow down the pace of rate hikes to 50-bp (from 75-bp), reaching a level of 10.50%, in the last meeting of the year. Next year we expect Banxico to continue following the Fed (keeping the rate differential unchanged), amid a likely difficult core disinflation trend. Our terminal policy rate forecast is at 11.50%, consistent with our view of the Fed fund rate peaking in the range of 5.25-5.50%.
João Pedro Resende