Mexico Inflation Seen At Highest Level In Two Decades In December

• Mexican annual inflation likely accelerated to a two-decade high in December, a Reuters poll showed on Monday, reinforcing expectations that the central bank will raise its key interest rate for the sixth consecutive time next month. 
• The consensus forecast of 11 analysts surveyed was for inflation to advance to 7.51% from 7.37% in November. If the prediction is correct, that would be the highest rate seen since January 2001, when inflation hit 8.11%. 
• The core rate of inflation, which strips out some volatile food and energy items, was seen accelerating to 5.94%, which would be the highest since October 2001. The Bank of Mexico (Banxico) raised its benchmark interest rate more than expected last month to 5.50% as it sought to contain rising price pressures. 
• Banxico's next monetary policy meeting is scheduled for February 10. The bank targets inflation of 3%, with a one percentage point tolerance range above and below that. That being said, we are likely to see more rate hikes in the near term as the government attempts to guide the inflation rate back to the target. 
• The higher rate will have a mixed impact on the banks and non-banking financial institutions (NBFIs) in Mexico that we currently recommend. While it is expected that the higher rates will result in a reduction in the demand for loans for banks, due to the higher borrowing costs, the revenue boost from the higher rates is expected to offset this factor. NBFI’s earnings could be affected by higher funding costs combined with the fact that NBFI business models focus on sensitive sectors of the economy, such as SMEs.

(Source: Reuters & NCBCM Research)