Banxico to Stop Following Fed’s Interest Rate Hikes: UBS

During the past few years, the Bank of Mexico (Banxico) has closely followed the decisions of the US Federal Reserve (Fed) when it comes to increasing interest rates to face the expected global recession. However, Banxico is beginning to look for a way to disengage from the Fed but this decision depends on the behavior of inflation, according to investment bank UBS. 

James Bullard, President, US Fed, recently announced that inflation might ease up in 2023 thanks to the GDP growth seen during the second half of 2022. However, Banxico still believes that raising interest rates will still be necessary. As Mexico has followed the US’s measures regarding monetary policy, spikes in interest rates might slow down in the Latin American country. “We expect Banxico to continue limiting the pace of hikes in the target rate, taking it to a terminal level close to 11.00% in 1Q23, and we do not rule out a subsequent slight deviation from the Fed’s actions,” says Alejandro Saldaña, Chief Economist, Grupo Financiero Bx+. Inflation is expected to decelerate further but remain above Banxico’s tolerance range until the end of 2024. On the other hand, further rate hikes by the Fed are anticipated, putting pressure on Mexico’s monetary stance.

The median target rate for the end of 2023 is expected to be 10.38%, according to the latest survey of expectations by Citibanamex. Although inflation has passed its inflection point, Banxico continues to remain cautious. While Mexico’s central bank has mainly followed the Fed’s interest rate hikes, it might stop doing so due to fears of a recession in the US and the differences in the behavior and outlook of both economies, according to UBS. “UBS believes that this will be the last hike of the cycle and that there is likely to be an easing of monetary policy, as well as some degree of decoupling with the Fed in the second half of the year,” writes Rafael de la Fuente, Chief Economist for Latin America, UBS.

 Jonathan Heath, a member of Banxico’s Board of Governors, told Bloomberg that Banxico still needs to raise its key interest rate at least once more and hold it at its peak for a minimum of six months to ensure inflation subsides. Heath added that it is still early to tell when policies will begin to relax and that cuts are likely not around the corner.