Mexico: 50bps rate hikes needed to maintain credibility –  Standard Chartered

Taking into accont the minutes from the last Banxico meeting and recent events, analysts at Standard Chartered expected the Bank of Mexico to raise the policy rate 50bps (instead of 25bps) at each of the next two meetings.

Key Quotes: 

“Banxico increased the policy rate 50bps, bringing it to 5.50%, at December’s policy meeting. Four board members who voted for the 50bps hike expressed concerns over wide-spread inflationary shocks, rising inflation expectations, and the ongoing tightening of global financial conditions, arguing that rate hikes need to be more aggressive and decisive to maintain Banxico’s credibility.”

“We now expect Banxico to deliver two more 50bps hikes at the next two meetings (instead of 25bps), bringing the policy rate to 6.5% by end-Q1-2022 (6.0%).”

“We see a possible surge in COVID cases, sluggish economic growth and labour market recovery as major downside risks to our policy rate forecast. Economic growth slowed by 0.21% m/m in October amid a contraction in agricultural and services activities, and the unemployment rate is still well above the pre-pandemic level, especially in urban areas. Limited monetary and fiscal stimulus provided during the pandemic could also justify slower rate hikes. However, given the concerns over inflation expectations and possible Fed tightening in March, we expect Banxico to frontload and increase rate hikes in Q1-2022.”