Mexico Follows Through With Rate Hike

Mexico has jacked up its policy rate by 25bp to 8.00% in an attempt to stamp out inflation, building on a 25bp rate hike enacted in June. This was in line with consensus and the post meeting communique is viewed as broadly neutral. The central bank adds that it will revise its inflation projections July 30 by approximately 50bp on average. The yield curve moved up by 12bp-15bp across the board, says Credit Suisse. “We would not expect another rate hike in August, unless inflation expectations worsen materially. For the balance of the year, we expect just one more rate hike of 25bp,” adds the shop. “We continue to expect Banxico to hike the overnight rate a further 25bp, to 8.25%, this quarter,” says Barclays. Others expect a pause. “We expect the central bank to leave the TdF unchanged at 8.00% until June 2009 as there are no demand-pull pressures on inflation and the balance of risk on growth has deteriorated,” says Goldman Sachs. “If, by the end of 1H2009, actual and expected inflation are converging toward 3.5% (i.e. the middle of inflation target upper half band) then we see the possibility that Banxico could initiate a monetary easing cycle involving three cuts of 25bp apiece, pushing the policy rate to 7.25% by end 2009,” it adds.