Why Banxico’s next move will be a hike

The recent patch of soft inflation in Mexico is unlikely to be sustained and the headline rate will follow a higher path than the central bank (Banxico) anticipates. With Banxico likely to revise up its inflation forecasts substantially at a time the Fed is shifting towards rate hikes, the balance of probabilities is tilted towards monetary tightening in Mexico. We expect two 25bp increases in the policy rate, to 7.00%, over the next six months which is hawkish compared to the consensus and market pricing.