Mexico: Still expecting Banxico to keep rates steady throughout 2021-22 – BBVA

On Thursday, the central bank of Mexico, as expected, kept interest rates unchanged. Analysts at the Research Department at BBVA, continue to expect that Banxico will keep interest rates steady throughout 2021-22 as opposed to the more hawkish view priced in by financial markets. They argue the central bank has become more worried about inflation, but does not seem to be overly concerned 

Key Quotes: 

“Banxico’s Board unanimously decided to keep the monetary policy rate on hold at 4.0%, as expected by all analysts. In our view, the wording changes point to a long pause even on the back of increasing inflation risks. Unsurprisingly, Banxico acknowledged both higher inflation and increasing risks on the back of higher-than-expected inflation in April along with mounting inflation risks arising from the further increase in energy prices, rising costs and initial signs of higher services prices led by a change in relative demand as the economy gradually normalizes.”

“In our view Banxico’s Board will not be in a rush to start a hiking cycle and is not overly concerned about inflation. We continue to expect Banxico to keep rates steady throughout 2021-22 as opposed to the more hawkish view priced in by financial markets, which are now anticipating a 25bp rate hike in the next nine months while odds of this hike taking place in six months are now close to 50%.”