Banxico: surprise hike a sign of things to come

The surprise 25bp rate hike by Mexico’s central bank (to 4.25%) suggests that its reaction function is less dovish that we had expected, as it is now reacting to quell high inflation. With the headline and core rates set to remain above target over the coming months, we are now pencilling in a further 100bp of hikes (to 5.25%). But we think that investors have gone too far in pricing in a prolonged tightening cycle.