Banxico, Mexico’s Central Bank unexpectedly switched to monetary tightening by raising its benchmark interest rate to 4.25% after a 3-2 split vote amid an inflation spike. All 23 economists surveyed by Bloomberg were surprised by the decision as Banxico is battling strong price pressures, with the inflation rate climbing faster than expected and reaching over 6% in early June. After the 115bp tightening, traders predict more aggressive increases and also expect a first quarter-point hike as early as August.
“Considering the current balance of risks, it will be hard not to deliver further hikes in coming decisions, which is one of the reasons why the curve will most likely price in an even more aggressive tightening cycle ahead, at least in the short term,” said Claudia Ceja, a strategist at BBVA in Mexico City. The Mexican peso recovered 2.4% after the news, triggering emerging-markets currency gains, whilst its local currency bonds tumbled.
For the full story, click here