Mexico: Banxico’s tightening cycle will likely continue – BBVA

On Thursday, as widely expected the Bank of Mexico hike the key interest rate by 25 basis points to 4.75%. According to the Research Department at BBVA, the tightening cycle will likely continue. They have a base scenario of one more 25bp rate hike in November and an additional one to 5.25% in December. 

Key Quotes: 

“Banxico hiked the policy rate by 25bp to 4.75%; the wording of the Statement was broadly unchanged. The central bank still thinks that current inflation pressures will prove temporary, acknowledges that long-term inflation expectations have remained stable, and continues to project that inflation will ease sharply in 2H22. Yet, the majority of the Board also continues to believe that additional pre-emptive tightening is warranted.”
 
“Considering that Banxico expects core inflation pressures to intensify in coming months, we stick with our base scenario of one more 25bp rate hike in November but our bias now shifts to an additional one to 5.25% in December. Yet, as inflation is expected to decline sharply next year and taking into account the implied tightening with an increasing ex-ante real policy rate, a wide negative output gap, and with a new governor, likely more dovish, we stick with our view that the tightening cycle will not reach the c. 6.0%-6.25% levels currently priced in by markets.”