Mexico Central Bank Turns A Bit Hawkish

By Win Thin

Mexico central bank kept rates steady at 4.5% today, as expected. However, it tilted a little more to the hawkish side and supports our view that tightening is likely to start in Q4 11 and not Q1 12 as market is pricing in. Central bank noted that the balance of risks for inflation is deteriorating, and noted that higher commodity prices resulting from Mideast turmoil and bad weather may spur inflation this year. The change in tone comes despite CPI inflation easing to 3.6% y/y in mid-February from a peak of 4.4% in December, and back within the 2-4% target range. Core CPI has eased steadily to 3.3% y/y in mid-February from over 4% in early 2010. Instead, the bank appears to be focusing on the output gap, which it said is likely to close by mid-2011.

MXN offers decent yields, and is likely to become more attractive in the months ahead. To given a bit of perspective, we note that Mexico’s policy rate was 8.25% before the global crisis hit. Inflation was much higher than, peaking at 6.5% y/y in December 2008 before falling back. The 2011 low for USD/MXN around 11.94 is the next big target, and with risk appetite coming back, further gains are likely for the peso. The 5- and 20-day moving averages have also just crossed to the downside, suggesting further USD losses ahead. Mexico officials have stayed quiet about peso strength at current levels. There are not many chart points beyond the 12 area and so break of that 11.94 low could see a quick move to 11.5, where we may start to see some official “concern” about the peso. Mexico is no longer just an oil story, but at the margin, high oil prices will unequivocally help the budget and debt ratios.