Banco De México Hold No Surprise Amid Inflation Spike

• On May 13, policymakers at the Banco de México (Banxico) held the benchmark interest rate at 4.00%. This was the second consecutive hold for Banxico after a 425 basis point (bps) cutting cycle that began in August 2019 and accelerated in H1 2020 as the Covid-19 pandemic arrived.
• While Banxico expects higher inflation will be transitory as it reflects strong base effects and temporary goods shortages from logistical bottlenecks, Fitch Solutions believes that upside risks to price growth contrasted against a still-recovering economy suggest that the bank has limited room for maneuver in either direction.
• In addition, the agency sees a risk of increased financial market instability due to rising US bond yields and Mexico’s mid-term elections on June 6, which will further encourage Banxico to maintain its current stance. The bank’s statement reflected these pressures, striking a more cautious tone.
• That being said, Fitch Solutions maintains its view that Banxico will hold its benchmark rate at 4.00% through the end-2021 to support economic activity and investment before raising rates in 2022 by 25bps.
• The agency expects the bank will be cautious about raising borrowing costs amid the country’s economic recovery, particularly as the government has enacted minimal fiscal stimulus and an accommodative US Federal Reserve will ease upside pressure on Mexican interest rates in the near term.

(Source: Fitch Solutions)