“Bank of Mexico, forced to raise the rate by the same magnitude”

Banco de México (Banxico) will raise the funding rate by three-quarters of a point at its meeting next Thursday, just as the United States has done, strategists from Franklin Templeton investment funds and BWC Capital agreed.

In Banxico’s Governing Board they are clear that they cannot reduce the rate differential because it would generate a disorderly depreciation of the peso, argued the investment vice president at Franklin Templeton, Luis Gonzali.

He made reference to Deputy Governor Jonathan Heath’s speech at the Mexican Association of the Automotive Industry (AMIA) to explain that the restrictive stance will help contain inflation expectations and by following the same path as the Fed in rate hikes, deterioration will be avoided. in the price of the peso, which has limited the possibility of creating additional pressure on inflation.

Gonzali noted that the US central banker also mentioned that a bit of luck is required for inflation shocks to be reduced. It’s funny that he talks about luck when he’s presenting a strategy to reduce inflation, he said.

At Franklin Templeton they estimate that Mexico’s reference rate will end the year between 9.75 and 10.25%, a range that implies a difference from the range of 9.5 to 10% that they forecast before the Fed’s announcement.

Besides, the director of Analysis at Black WallStreet Capital (BWC), Jacobo Rodríguez, agrees in estimating that Banxico must increase rates by the same magnitude as the Fed between now and the end of the year and even next.

But remember that Mexico began the upward cycle before, which gives it a certain advantage to be able to pause, once it is also identified that the internal inflationary pressure is reversing.

At BWC they estimate that the reference rate will end the year at 9.25% and that at the end of the cycle it will be at 10.50%, which is expected to occur in the first half of 2023.

Fed hawkish, negative rate

For strategists, the decision of the Federal Open Market Committee of the Fed (FOMC) was discounted. What did surprise the market were revised expectations, particularly for GDP.

Rodríguez highlighted that the Fed’s forecast for this year’s GDP went from 1.75 to 0.2%, which implicitly indicates that they are willing to take the economy where it is necessary to reduce the pressure of demand on inflation.

“And whatever is necessary also goes through a recession,” he clarified.

Gonzali clarified that the United States economy has registered a negative performance in the first half of the year, taking away strength from the dynamism and recalled what President Powell said at the press conference, noting that the US partners are also in a phase slowdown that does not encourage exports.

The tone of the Fed’s speech is hawkish, Rodríguez stressed, although the rate is still in a neutral phase, if we take into account that average inflation will be 5.4% and the year-end rate will be 4.5%, the spread remains negative and therefore do not have a restrictive rate.

The President of the Fed admitted that it is necessary to further increase the yield to take it to a restrictive terrain.

target inflation

Gonzali ruled out that the FOMC’s projection of the specific inflation target to be reached in 2025 is a factor of concern.

Let’s remember that the risk at some point was that US inflation could reach double digits. The Committee’s forecast is that it will be at 2.8% in 2023, which implies that it will be closer to the objective”, he concluded.


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