Commerzbank’s Michael Pfister observes that markets expect substantial tightening by Banxico over the next year, but he questions whether conditions justify 75 basis points of hikes. With Mexican inflation near 3.5–4% and the real economy having contracted on weak investment and higher imports, he sees little need for higher rates and therefore limited upside for the Mexican Peso (MXN) versus the US Dollar (USD).

Banxico tightening bets questioned

"A look at interest rate expectations in North and South America reveals that the Mexican central bank is expected to implement some of the most significant tightening measures over the next 12 months. This expectation has certainly been bolstered by Banxico's decision to leave interest rates unchanged at the end of June, having cut them twice by 25 basis points each since the start of the war in Iran despite higher global energy prices."

"But is this enough for Banxico to switch not only to rate hikes, but also deliver 75 basis points of tightening in the coming months? We have our doubts."

"Although this is likely due to a base effect, year-on-year inflation of between 3.5 and 4% is unlikely to provide grounds for tightening, in stark contrast to four years ago when inflation was twice as high."

"The Mexican real economy remains in a difficult position: in the first quarter, the economy actually contracted. While this was largely due to lower investment and higher imports, this does not exactly call for a tightening of monetary policy."

"For the peso, this means that upside potential is likely to remain limited for the time being. There is little reason to expect further interest rate rises."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)