Banxico to hold on rates - TDS

Sacha Tihanyi, Senior Emerging Markets Strategist at TDS expects Banxico to hold on rates for the August meeting at 7%, a level which we believe represents the height of the easing cycle.

Key Quotes

“Inflation, while still high by historical standards and increasing on a Y/Y basis on a number of metrics, is showing much improved dynamics in the near term, to a degree that we believe that Banxico will look through the Y/Y reads driven by base effects and fading momentum. Indeed, the 3-month trends in M/M s.a. core and core sub-aggregates generally peaked in September of last year and have been declining since. Now that inflation expectations have retraced and remain generally anchored (despite a small uptick in June) at lower levels than were persisting during the pick-up in inflation during H2 of last year, Banxico likely feels comfortable in riding out further minor upside in prices on a year-on-year basis.”

“Furthermore, Governor Carstens suggested in the immediate wake of the June meeting that policy settings were sufficient to bring the inflation rate down to the 3% target by the end of 2018. He has since expressed that Banxico sees the ceiling in inflation being reached in the coming months, and stressed the lags with which monetary policy operates. Both of these suggest to us a concern regarding over-tightening. Indeed, Banxico is certainly well aware of the elevated level in Mexican real rates, which (on an ex ante basis) sit at the highest level since early 2009.”

“We don’t feel this is a particularly “high risk” Banxico meeting given that inflation would be the only reason to hike at the current juncture, and our view that Banxico is now past the inflation-driven hiking cycle. The next test will come in late Q3, when TD currently expects the next Fed hike. However given inflation and economic dynamics, as well as official Banxico messaging, it’s our view that the next time Mexico changes rates, it will be to the downside.”