Market Wire - Peso Slightly Stronger as Banxico Delivers Hawkish Hike

In line with market expectations, Mexico’s central bank (Banxico) raised interest rates by 75 basis points to 7.75 percent and promised more to come, noting that “for the next policy decisions, the Board intends to continue raising the reference rate and will evaluate taking the same forceful measures if conditions so require.”

The decision was unanimous, with doves like Gerardo Esquivel (who had previously dissented in favour of 25 basis points earlier in this tightening cycle) signing on. The peso gained slightly on the affirmation of the bank’s autonomy, but the broader directional trend of the currency is more likely to be driven by global risk appetite and the US economic and rate outlook.

The hike came after inflation prints released earlier in the day showed biweekly core inflation accelerating to 0.5 percent month-on-month, and 7.47 percent year-on-year, well above expectations and far above target. The bank’s forecasts see a significant increase in inflation by year-end 2022 (now 6.8 percent, up from 5.9 percent at last month's meeting) and a return to its target of 3.0 percent only in 2024.

The combination of the bank’s language and its forecasts underscores its independence and determination to bring inflation back to target. This is unlikely to be palatable to President Andres Manuel Lopez Obrador, who has made his displeasure at the bank known. However, he can do little but complain loudly for now, which in turn, may undercut sentiment on Mexico’s broader trajectory under his charge.