Economic Analysis - Decelerating Inflation Will Support Rate Cuts - DEC 2017
BMI View : Mexico ' s rate hiking cycle has likely come to end. Decelerating inflation over the coming months will support the beginning of a rate cutting cycle in 2018.
Banco de Mexico (Banxico) will begin a rate cutting cycle in 2018. After raising rates at every monetary policy meeting since December 2015, totalling 400 basis points (bps) of rate hikes, Banxico held at its meetings in August and September, in line with our view ( see 'Banxico Likely On Hold Through Year-End', June 30). Inflation will begin to decelerate over the coming months, allowing the bank to hold its benchmark interest rate at 7.00% through end-2017 and cut rates in the months thereafter. However, with inflation rising beyond our expectations and Banxico expressing a more cautious tone in its latest communiques, we have upgraded our end-2018 interest rate forecast to 6.00%, from 5.50% previously.
Inflation has likely peaked and will begin to decelerate over the coming months. At 6.7% y-o-y in August, inflation remains well above the bank's tolerance band of 3.0% +- 1.0%, largely reflecting price shocks related to the liberalisation of fuel prices. The effect of those price shocks will ease in the months ahead, while exchange rate stability will mitigate the pass-through effect of import cost growth. Banxico reports that mid-September inflation figures showed a modest deceleration, supporting our view. Nonetheless, with inflation rising more than we expected over recent months, we have upwardly revised our forecasts for 2017. We forecast inflation at 5.8% at end-2017, up from 4.2% previously, averaging 5.9% over the year, up from 5.2%.
|Inflation Has Likely Peaked|
|Mexico - Inflation & Policy Rate|
|Source: Banxico, BMI|