The Bank of Mexico (Banxico) will match the increases in the reference interest rate of the United States Federal Reserve in the remainder of the year, to disengage in 2023, analysts estimated.
This is to maintain the same rate differential, so the consensus expects the monetary authority to raise the target interest rate by 75 basis points today, a rise similar to that of the Fed last week and it would be the first adjustment of this magnitude since there are records.
If this adjustment materializes, increases of 175 points would be expected in the rest of the year, to place the target rate at 9.5 percent, a historical level, in accordance with the expectation of a similar increase in the Fed rate in the period, until reach a range of 3.25 to 3.5 percent.
“There is a broad consensus that Banxico will match the increases expected by the Federal Reserve (Fed) until December, taking the policy rate to 9.50 percent by the end of the year,” BBVA analysts said.
They added that the wide interest rate differential against the Federal Funds, the economic slowdown and a falling inflation rate will allow Banxico to disassociate itself from the Fed next year and start a cycle of gradual easing in the last quarter.
“The Board may not feel comfortable disassociating itself from the Fed amid heightened uncertainty, recent volatility and the need to drive an orderly tightening in markets,” Barclays analysts said. Thus, they estimate an adjustment of 75 points in today’s meeting, 50 points in July and August, and later adjustments of 25 points until reaching 9.5 percent.
“In order to maintain competitiveness in terms of rates, Banxico would have to continue raising the rate when the Fed does. The least that is required is to add an additional element of possible pressure on inflation, through a transfer of the exchange rate to prices”, said CI Banco analysts.
Jacobo Rodríguez, director of financial analysis at Black Wallstreet Capital, estimated that there will be an adjustment in inflation forecasts again. “The important thing about the statement will be the updating of their economic expectations, because inflation has been accelerating and has not allowed the agency to make downward revisions, on the contrary, all the revisions have been upward.”
They don’t rule out surprises
Specialists do not rule out the surprise of an increase in the rate of 100 basis points, if the inflation data for the first half of June turns out to be worse than expected.
“Banxico will at least increase the interest rate in the same proportion as the Fed; The market has already discounted the 75 points that were expected, but there is some speculation about whether the rate can be increased more compared to what the Fed did, since inflation in the fortnight of June may be higher than expected” said Jorge Gordillo Arias, director of economic analysis at Ci Banco.
“The market has already considered an increase of 75 base points, but I do not rule out that it could be an increase of 100 base points. We could also expect a change in inflation expectations and a more restrictive tone in the statement,” explained Gabriela Siller, director of economic analysis at Banco Base.
Impact on the economy
José Luis de la Cruz, director of the Institute for Industrial Development and Economic Growth (IDIC), asserted that one of the points to be discussed at Banxico’s Governing Board will be the possible slowdown in the Mexican economy.
He said that the members will have a very intense dialogue on the economic consequences that the country is going through and how monetary policy can be a risk factor for growth.
BBVA analysts pointed out that Banxico’s adjustments will result in strong headwinds for economic activity, something that, considering the time horizon in which monetary policy operates, will become evident next year.