Banxico Seen Continuing Rate Hikes

Following last week’s surprise Mexican rate hike, which dragged down stocks, analysts anticipate further monetary tightening this year. Banxico raised the overnight rate by 25bp to 7.75% Friday, its first change since October. “We do not view this as the start of a long tightening cycle and we tend to think that the bank may require less of a tightening than the curve is currently pricing in (50bp in six months),” says Credit Suisse. Morgan Stanley meanwhile revised its prediction for the year-end rate to 8.00% from 7.50% previously. “Hiking interest rates in Mexico today is akin to buying fire insurance: the subsequent absence of a fire is hardly valid criticism of the decision to purchase insurance in the first place,” adds the shop, rejecting criticism of the move at a time of slower growth. Morgan Stanley also adjusted upward its Mexico inflation forecast for 2008 to 4.3% from 3.8% and for 2009 to 3.5% from 3.3%. Inflation has been on an upward trend since the start of the year, rising from 3.70% in January to 5.00% in May, mostly caused by the effect of high international prices for food and energy.