The Bank of Mexico (Banxico) would raise the reference interest rate by 50 basis points at the meeting on May 12, to leave it at 7%, agree strategists from Goldman Sachs, UBS and Pantheon Macroeconomics.
The upward pressure that maintains inflation in Mexico and the expectation that the Federal Reserve (Fed) will aggressively increase its rate at next week’s meeting are the factors that give rise to this forecast.
If the forecast is correct, the fourth consecutive increase of 50 base points will be spun and the strategy applied by the Governing Board will be repeated, between September 2016 and February 2017, when it directed four consecutive increases in the rate of 50 base points, to take it from 4.25 to 6.25 percent.
That upward cycle was presented to respond to the fuel price liberalization process, the so-called “gasolinazo”.
According to UBS chief economist Rafael de la Fuente, the risk of a 75 basis point increase is low, even if the Fed accelerates its rate of hikes.
In his perspective, “Mexico’s large production gap provides room for Banxico to disassociate itself from the Fed later, especially if inflation improves.”
This means that once the rate reaches 8%, the Governing Board will open a pause in the cycle.
For the analyst, it is likely that inflation will peak in April or May, and then begin a slow downward trajectory to converge on the 3% target in the first quarter of 2024.
They are getting ready
The senior economist at Pantheon Macroeconomics, Andrés Abadía, projects that the rate will end this year at 8.25%, which would return to the level where it was from February to June 2019.
He stressed that Banxico has sufficient arguments to assume a restrictive position (hawkish).
Like the UBS expert, Abadía considers that the conditions are in place to keep the rate at 8.25% this year, “although undeniably, the risks for our call are biased towards a substantial tightening,” he specified.
For Alberto Ramos, economist for Latin America at Goldman Sachs, a deterioration in inflation expectations is perceived and the clear indication of the Federal Open Market Committee of the Fed is consistent with the possibility that Banxico will increase an additional 50 base points in May.
For its part, the consultancy FocusEconomics identified in its monthly report of expectations that six financial groups and consultancies anticipate that the Bank of Mexico will leave the rate at 8.50% at the end of the year.