Mexico Hikes Rates By 50bps As Inflation Soars

Tyler Durden's picture

The Central Bank of Mexico hiked rates 50bps to 6.25% (as expected) and sent the peso rallying modestly. As Bloomberg notes, Banxico appears more concerned at inflationary pressures than growth slowdown.

Mexico Central Bank Issues Statement Following Rate Decision:
  • Banxico to Closely Watch Mid, Long-Term CPI Expectations
  • Banxico to Watch Potential FX Pass-Through to CPI
  • Banxico to Continue Watching Policy Posture vs U.S. Fed
  • Banxico to Closely Monitor Gasoline Prices

Bloomberg Intelligence Latin America Economist Felipe Hernandez:

"The central bank says the inflation outlook has kept deteriorating. This implies the relief from peso appreciation until now has been limited, or at least that it has been more than offset by the sharp increase in fuel prices. It could moderate expectations for a less hawkish central bank and keep the door open for additional tightening."

And Alejandro Cervantes, an economist at Grupo Financiero Banorte SAB, says:

"Decision is very dovish with respect to growth, but hawkish with respect to inflation expectations. This discards the chance of a rate hike in March."

 

Banorte sees a second 50 basis point rate hike in June.

The peso is rallying modestly...

 

Some context for the rally..

The hike comes hours after Mexico reported that consumer prices soared by 1.51% mom during January, driven mostly by higher gasoline and cooking gas prices, and also higher urban public transportation tariffs, as a result of the gasoline price hike. Combined, these items added 126bp to headline inflation. In addition, core prices continue to be under pressure, with a high print in core-goods (both food and non-food). Inflation would have been even higher were it not for the sharp decline in perishable food prices (fruit and vegetables: -3.60%, compared with +6.98% during the same period a year ago).

Annual headline inflation accelerated to 4.72% yoy, up from 3.36% during Dec. However, headline inflation moderated to 4.66% yoy during 2H Jan from 4.78% yoy during 1H Jan. With the high Jan print, annual core inflation rose to 3.84%, from 3.44% in Dec. Overall, core-goods inflation is now tracking at 4.75%, up from 2.86% a year ago, with inflation among core-goods food/beverages/tobacco doubling to 5.27% from 2.59% a year ago. This is a sign of accelerating pass-through pressures from currency weakness. The acceleration of core food prices constitutes a regressive tax on low-income households that could jeopardize the buoyancy of private consumption. In addition, core-services inflation rose to 3.07% yoy during Jan.

As Goldman adds, the recent inflation figures suggest a deterioration of the inflation outlook, and some generalization of inflationary pressures.

The sharp MXN depreciation during the last 12 months and recent upward move in inflation expectations added upside risk to the inflation outlook in spite of the loss of growth momentum, and explains today's rate hike.

However, going forward, in the calibration of monetary policy the central bank should also be mindful of the fact that the economy, and particularly confidence indicators, is weakening (which implies no demand-pull pressures on inflation over the forecasting horizon) and as rates continue to rise the impact on real activist and employment starts to become more visible and costly. Furthermore, the MXN has shown some signs of stability (to mild strengthening) in recent weeks, and most of the recent surge in inflation derives from lagged FX pass-through and a shock to administered prices.

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edifice's picture

You guys are getting better... 15 min chart, this time! Thumbs up!

Raffie's picture

So Venezuela comes to Mexico?

BandGap's picture

Was thinking the same thing. The hombres with the pesos are getting twitchy.

What would be the reason for capital to stay in Mexico, especially with The Don working his magic? He might not building a physical wall yet, but he is building a moat around US businesses.

Would love to be a fly on the wall when he talks to some of these companies that are coming back.

QQQBall's picture

Mexico is afraid of increased capital flight.

 

fixed it.

azusgm's picture

Totally nuts.

Pemex needs to bring the price of gasoline back down and deal with their liquid and gaseous hydrocarbon infrastructure and security of same. The Mexicans can't get rid of their loser presidente quickly enough.

shizzledizzle's picture

I thought everything was better when the peso hit a nickle yesterday?! LOL

steve2241's picture

The buying power of Americans retired in Mexico is soaring.

deer_flasher's picture

Now that you mention it, it's a pretty good idea to send em back to the US indeed so they can retire peacefully in america

monoloco's picture

What's the point of your meme? It could have just as well been a photo of Manhattan or Silicon Valley, and a photo of a poor barrio in Tijuana.

centerline's picture

Mexico is afraid of pissing off the peasants.

azusgm's picture

Not too afraid or they never would have hiked the price of gasoline in such a way. The gasoline price hike is what set off the sudden inflation. You couldn't ask for a better recipe for social unrest if you wanted it.

Look for the same men (and women) behind the curtain in Mexico as the ones who set the Mideast on fire and started the mass migrations into Europe. Someone expected to do the same with a mass move from Mexico into the US but got a surprise on November 8th.

Globalist ghouls fomenting suffering and unrest.

All IMO.

deplorable nation's picture

HURRY-UP WITH THAT GODDAMN WALL!

Dragon HAwk's picture

National guard, desert training, coming right up.  string out at 100 yards till the barbed wire gets here, and check your ammo.

vasallo7g's picture

Do you know you dont have to hire the illegals we send from Mexico, right?

BSHJ's picture

Wow, I sure WISH the US rate were up in that range, that would be fabulous......a decent return on cash and real estate prices would be much more reasonable.

moonmac's picture

Billionaire Cartel Leaders don’t care about no stinking Mexican inflation. All their money is in US Dollars.