Mexico cenbank cites 'overwhelmingly negative' inflation outlook

The minutes of the Mexican central bank's latest monetary policy meeting reaffirm a decidedly hawkish outlook, all but guaranteeing an additional rate hike on February 8.

"By virtue of the high levels of inflation, its persistence and the risks faced, and depending on the behavior of prices and their prospects in the coming months, it is likely that it will be necessary to increase the reference rate again, including during the next monetary policy meeting," said one monetary policy board member in the minutes released on Thursday.

The board raised the rate 25 basis points to 7.25% at the Dec. 14 meeting, and while the announcement noted that one board member wished to go further with a 50bp hike, the minutes painted a more revealing picture, with one member saying the balance of risks to inflation had become "overwhelmingly negative."

Mid-December inflation climbed to 6.69% from 6.63% in November, reaching a 16-year high, and this did shift investor outlook for monetary policy as well as yield curves in the fixed market. The central bank minutes, however, look to push these positions even farther.

A note to investors from Banorte-IXE asserted the tone of the minutes was "significantly more hawkish" than the Dec. 14 monetary policy announcement, "alluding to two increases in the reference rate in the first half of 2018."

The outlook is distinctly different from that of the bank's in August, when analysts were betting on a rate cut shortly after the July 2018 presidential election, and the belief held strong that the 400bp tightening cycle running from December 2015 to June 2017 had come to an end.

"All the members emphasized that given the simultaneity and magnitude of the shocks, as well as high inflation levels, the main challenge of the governing board is to keep expectations anchored [to the goal of 3% inflation] in the medium and long term," added Banorte, suggesting difficulty in even doing this after steady affirmations throughout 2017 that inflation would be near 3% by the end of 2018.

Another member also explained that monetary policy should emphasize that until the risks related to the renegotiation of NAFTA and the electoral process next year dissipate, "the relative monetary stance between Mexico and the US should not weaken," bringing to light the two principal unknowable factors fostering investor concern in Mexico next year.

Irrespective of that, Banorte still maintained there could be as much as a 50bp rate cut in the second half of 2018 as these questions begin to unwind.