Operators expect greater increases in Mexico after aggressive Banxico

(Bloomberg) Mexico's central bank pleased traders by closing the door to a slowdown in the pace of rate hikes, only for them to take advantage and call for an even more aggressive tightening.

The country's swap rates, known as TIIE, rose on Friday when traders began betting that monetary policymakers could increase the pace of tightening as expectations of the Federal Reserve's hikes and local inflation continued to rise. The two-year TIIE rose almost 17 basis points to 8.925%, the highest level since November 2008. The curve now estimates that the monetary policy rate will rise by almost 300 basis points by the end of the year, reaching 9.5%, up from 250 basis points before Thursday's decision. For the May rate decision, the odds are divided between 50 and 75 basis points.

Banxico, as the bank is known, increased borrowing costs by half a percentage point, as widely expected, and closed the door to a slowdown in the rate of tightening by revising CPI projections upwards and recognizing increased inflationary pressures. Unlike the previous meeting, the decision was unanimous, which was seen by analysts as a sign of a tough stance. In February, Lieutenant Governor Gerardo Esquivel voted for a smaller increase of a quarter of a percentage point.

“We see slightly higher chances of a 75 basis point increase in the short term, especially if the Fed decides to accelerate its tightening pace,” said Andrés Pardo, chief macro strategist for Latin America at XP Investments.

As US markets anticipate further tightening of the Federal Reserve this year, expectations about the amount of increases south of the border also grow, given the prevailing view that Banxico will have to at least match what the Fed does. On Friday, the Federal Reserve's forward OIS interest rate swaps deducted 200 basis points from further increases until the December meeting, with a probability of more than three out of four of a 50 basis point rate increase in May.

The TIIE curve also stepped, and on Thursday the spread between the two- and ten-year swap rates posted the biggest rise in more than four months, as investors added a long-term risk premium. The inclination may be related to the fact that President Andrés Manuel López Obrador announced Banxico's interest rate decision hours before the official release, which caused some concern about the central bank's autonomy.

“These very arrogant comments by the president, along with his interventionist plans in the energy sector, suggest that Mexico's poor investment climate is unlikely to improve in the short term,” said Nikhil Sanghani, economist for Latin America at Capital Economics. While AMLO's words did not shake local financial markets this time, “it could be a growing concern in the coming months,” Sanghani added.

Original Note:

Mexico Traders Call for Even More Hikes After Hawkish Banxico

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