Banco de Mexico (Banxico) increased the policy rate by 25-bp in a unanimous decision (to 11.25%), in line with both our forecast and market expectations (as per Bloomberg). Thus, Banxico decelerated the pace of hikes (from 50 bps in the previous meeting). In our view, the next decision will likely depend on the evolution of incoming data, in particular the behavior of the core inflation reading.
Headline inflation has decreased more than expected, mostly due to the evolution of the non-core component, while core inflation has adjusted downward gradually. Forecasts for headline were revised marginally, while core inflation remained unchanged. Quarterly annual headline inflation is expected to reach 4.8% in 4Q23 (from a previous estimate of 4.9%), while forecasts for core inflation remained at 5.0%. Both, headline and core inflation forecasts remained flat at 3.1% in 4Q24.
The balance of risks for inflation remains biased to the upside. The upside risks for inflation list is led by the persistence of core inflation at high levels; followed by foreign exchange depreciation due to volatility in international financial markets; greater cost-related pressures, and pressures on energy prices or on agricultural and livestock prices. Downside risks are led by a greater-than-anticipated slowdown of the world economy; followed by a lower pass-through effect from some cost-related pressures; a decline in the intensity of the geopolitical conflict or a better functioning of supply chains; and a larger-than-anticipated effect from the Federal Government’s measures to fight elevated prices.
Our terminal policy rate forecast is at 11.50%, implying one additional 25-bp rate hike in May.
Joao Pedro Resende