BANXICO PRIMER: Banxico rate decision due Thursday 30th March 2023 at 20:00 BST / 15:00 EDT

Analysis details (14:00)

SUMMARY: Banxico is expected to hike by 25bps at its meeting, according to all 20 analysts surveyed at Reuters, while Banxico's rate guidance in February alluded to another hike in March, but of a smaller magnitude than the 50bp seen in Feb. The latest inflation data, mid-month CPI, was cooler than expected which will be welcomed by the board after they raised all forecasts across the horizon at the last meeting. A 25bp rate hike would take the key rate to 11.25% in March, while there will be particular attention on guidance to see if it signals more hikes are coming. Deputy Governor Heath stated at the end of Feb that current data points to a terminal rate of between 11.25 and 11.75%, noting he does not expect rates to be beneath 10% by year-end. Governor Rodriguez has downplayed the impact of the US/EU banking crisis in Mexico, she does not expect the crisis to impact the Mexican banking system, noting the system is solid and has liquidity. Banxico's Borja, when asked if banking fears in the US and EU will influence monetary policy decisions, said many variables will come into play, but their principal mandate is inflation. 

RECENT MEETING: In February, Banxico opted to hike rates by 50bps once again and signalled another, smaller hike at the next meeting by stating "the upward adjustment to the reference rate could be of lower magnitude". Some had expected February to be the final hike from Banxico, but it is clear their fears on inflation remain and more tightening is needed to return inflation to target. The inflation forecasts saw both headline and core figures revised up across the entire forecast horizon, but it is still expected to return to target in the latter half of 2024 as a result of the extra tightening. Nonetheless, Banxico holds the view that inflation risks remain biased to the upside. Note, although the decision was unanimous for a 50bps hike, the December meeting saw a dovish dissenter opt for a 25bp hike. The dovish dissenter was Esquivel, who has since retired from the board and Omar Mejía Castelazo has taken his place - showing he is more aligned with the rest of the board than his predecessor Esquivel.

DATA: Data released last week showed mid-month CPI rising 0.15% M/M, slightly short of the +0.3% that the street was looking for, while the headline rate of inflation slowed to 7.1% Y/Y from 7.5%. Pantheon Macroeconomics notes that inflation has continued to fall in Q1, and that is helping to improve the economic outlook. “The main threat now to economic activity is further Banxico policy tightening,” Pantheon says, “we think any rate hike over the next few months is a mistake; we think policymakers have done enough to return inflation to the target,” and adds that “moreover, we can’t be sure that the threats to the global banking system are over.”

RECENT COMMENTARY: Banxico Deputy Governor Espinosa, who dissented on the monetary policy statement (but not the decision), said the inflation rate has brought some good news, but we are in a complex and uncertain environment. She added an uncertain environment makes specifying the magnitude of possible rate moves risky, noting there is a risk of again surprising the market by giving very specific forward guidance on the magnitude of future rate moves. Deputy Governor Borja said they are very near to ending the rate-hiking cycle but they need to be very careful in calibration. On the Peso (MXN), she said a strong MXN helps ease price rises in Mexico's imports; although the Peso strength's impact on inflation is "complex". Governor Rodriguez acknowledged economic activity in Mexico continued growing in Q4 though it decelerated. Deputy Governor Mejia said we are near an adequate level for rates, noting the disinflationary process will continue this year and next year. 

29 Mar 2023 - 14:00- Fixed IncomeData- Source: Newsquawk