Economic Analysis - Quick View: Rate Increase Suggests Banxico's Inflation Concerns Linger - JULY 2017

The Latest: The Banco de Mexico (Banxico) raised its policy rate by 25bps to 6.75% on May 18, in line with our expectations. This was the fourth consecutive hike by the bank and brought the rate in line with our end-year forecast.

Implications: The rate increase, which was not indicated in Bloomberg survey estimates, highlights that Banxico remains concerned about staving off secondary effects from substantial currency depreciation early in the year and a significant increase in retail fuel prices, and ensuring that medium and long-term inflation expectations remain anchored. Headline inflation was 5.8% y-o-y in April, up from 5.4% y-o-y in March and well outside of the bank's 3.0% +- 1.0% tolerance band.

What ' s Next: With inflation likely to head moderately higher in the next few months, we will be revisiting our inflation and interest rate forecasts for 2017 in the coming weeks. As evidenced by the latest meeting, a further acceleration of inflation, even if temporary, could spur additional rate hikes before Banxico takes a pause.

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