Mexico inflation spike fuels bets central bank could hike rates by year end

[MEXICO CITY] The recent spike in Mexican inflation is fueling expectations the Bank of Mexico will hold its key interest rate steady over the coming months but raise it by the end of the year, a move the market had not been expecting until 2022.

Banxico, as the central bank is known, kept its key interest rate unchanged at 4.0 per cent at its last policy meeting on March 25, and said inflation will now likely be slightly higher in the coming months than previously forecast.

Driven by rising fuel prices, Mexican inflation accelerated to 4.67 per cent in March, the highest level since December 2018 and above Banxico's target range, limiting the bank's room for maneuver on monetary policy, economists said.

Rate swaps in Mexico project increases of 30 basis points to the key rate for the end of 2021, according to Banorte, which now forecasts that Banxico will raise rates in December.

"Inflation and relative monetary policy conditions towards the end of the year look different," said Santiago Leal, deputy director of fixed income and exchange rate strategy at Banorte.

Banxico's upcoming monetary policy statements are likely to lean towards an "increasingly hawkish stance," Mr Leal added.

Still, Banxico said in minutes from the March 25 meeting that a pause in its easing cycle at its last meeting does not mean the cycle has ended and board members will be on the lookout for conditions that permit resuming it.

Banxico's comments came as the International Monetary Fund's steering committee said the global economy is recovering faster than expected from the Covid-19 crisis, but that higher interest rates could be painful for emerging economies.

Mexico's peso currency reacted to the acceleration in inflation and appreciated on Thursday to its strongest level in almost two months, close to 20 units per dollar.

Brokerage house Monex said in a research note that the inflation data confirmed "the Bank of Mexico's easing cycle has ended."

That would prevent additional decline in the peso by halting the erosion of so-called 'carry trades', it added.

REUTERS