Monetary Policy - Hiking To Continue With Inflation At 16-Year High - MAR 2018

BMI View: Banxico will likely extend its rate hiking cycle into 2018 with an additional 25bps hike at its February meeting in response to rising inflation. Uncertainty surrounding trade talks and rising interest rates in the US will also contribute to tighter policy stance from Mexico ' s new central bank governor Alejandro Diaz de Leon.

Banco de Mexico (Banxico) will likely continue to tighten monetary policy in 2018 in an effort to rein in inflation. While we expect inflation will begin to moderate in the coming months largely due to base effects, price growth will likely remain above-target. Banxico's new governor Alejandro Diaz de Leon will also be wary of the depreciatory effects of rising US interest rates on the Mexican peso and has stressed that there is too much uncertainty surrounding NAFTA renegotiations and inflation in order to change course on policy now, signalling additional hikes.

As such, we expect Banxico will likely extend its two-year hiking cycle into 2018, with an additional 25 basis points (bps) hike at its meeting on February 8. We have thus raised our end-2018 forecast for Mexico's policy rate to 7.50%, from 7.25% previously ( see ' Banxico On Hold Through Year-End, New Governor To Come ' , November 14 2017).

Rising Inflation Will Prompt Additional Hike
Mexico - Policy Rate & Inflation, % y-o-y
Source: Banxico, BMI

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