• Banxico is expected to raise borrowing costs by 25 bp to 4.75% on Thursday, in what would be the third consecutive rate increase
  • With the hike already discounted, traders will be more interested in the policy statement as the document may offer clues about the tightening cycle
  • Tighter monetary policy in Mexico is likely to be positive for the Mexican peso over the medium term, but in the short run, U.S. treasury yield dynamics and general market sentiment will set the tone for price action

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Banxico is scheduled to announce its September monetary policy decision on Thursday. Investors widely expect the institution led by Alejandro Diaz de Leon to raise the overnight interbank rate by 25 basis points to 4.75% in an effort to tame red-hot inflation and prevent upside risks from materializing. The hike, which would be the third in a row, has already been discounted, so it is unlikely to be a major market-moving event for USD/MXN in and of itself, though the statement bias could be important as it may offer clues about the trajectory of the tightening cycle.

Circling back to inflation, in the first half of the month, headline CPI stood at 5.87% y/y while the core indicator jumped 4.92% y/y, rising well above the 3% mid-point goal in both cases. At the same time, both metrics accelerated with respect to the previous fortnight, particularly the underlying gauge, a sign that inflationary pressures continue to broaden in the Mexican economy despite some price control measures implemented by the government.

With the consumer price outlook failing to improve noticeably, medium-term expectations could begin to de-anchor, complicating the central bank’s efforts to ensure CPI converges to the target over the policy horizon. For this reason, Banxico is likely to remain cautious and leave the door open to additional rate hikes in the fourth quarter, should incoming data …….


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