Mexico: Banxico to deliver a 25bp hike

Analysts at Nomura expect Banxico to deliver a 25bp hike and to remain hawkish.

Key Quotes

“The central bank will likely increase its policy rate at the 21 June meeting to 7.75%, from 7.50%. In our view, Banxico’s recent communication strategy when speaking about the convergence of its inflation forecast to 3.0% by Q1 2019 has been to preface it with the phrase “provided an orderly path for the MXN.” We interpret this as excluding MXN depreciation as it has done in recent past weeks.”

“In short, while there are other factors that could push up the central bank’s inflation forecast path, sharp MXN depreciation could push inflation higher and require a higher policy rate. Our model suggests that with MXN persistently around 20.5 inflation would be above the upper bound of the target band (2.0-4.0%) by December of 2018.”

“The output gap is around zero and we expect it to remain close to this level for the next two years, which is the general horizon for monetary policy. However, inflation is likely pick up due to MXN weakness. This, coupled with increased concerns from foreign investors over EM economies, could translate into higher risk premia in all EM including Mexico. We believe this would call for Banxico to continue increasing the policy rate.”

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