NEW YORK — Analysts and investors are pretty much convinced on what Mexico’s central bank will decide Thursday when announcing its sixth monetary decision of the year. The market is expecting a third consecutive rate increase of 25bps to bring its benchmark rate to 4.75%. The real debate is what happens in next.

“The reasoning behind this hike should be similar to previous decisions as the majority of the board have stated concerns that persistent high inflation along with upside risks could hamper the price formation process,” analysts at Barclays wrote in a report to investors.

The analysts argue that Mexico’s consumer prices index for the first half of September surprised to the upside as core inflation “remained pressured despite still weak domestic demand conditions.” This gives enough reasons to the board of governors led by Alejandro Diaz de Leon to apply another rate increase.

The nation’s general inflation may average 5.8% y/y in the third quarter, surpassing Banxico’s estimate of 5.6% y/y; while the core inflation would average 4.8% y/y, also above the central bank projection of 4.7% y/y, the analysts said in the report dated September 24.

The CPI’s trend may imply a divided monetary decision. “We might not see an unanimous decision yet given some board members’ view that monetary policy is inefficient under the current environment of gradual recovery and transitory shocks on inflation,” economists Pilar Tavella, Nestor Rodriguez, Alejandro Arreaza, Roberto W. Secemski wrote in the note analyzing Latin America’s monetary policy outlook.

In a divided decision in its August 12 meeting Banxico raised rates by 25bps to 4.5%, with two of five board members in favor of staying on hold.

Rate Increases Ahoy

Despite the board’s divisions, Barclays’ analysts reiterate their forecast that Banxico will raise 25bps per meeting until the policy rate reaches 5.50%, inside the range of what the monetary authority considers as “neutral levels.”

“Given the lack of consensus among the board on the need to tighten, risks might be toward a pause sooner than expected, but persistent high inflation and expectations of beginning of US Fed tapering by year-end make us believe that there might be space for such pause,” the analysts wrote in the report.

Barclays’ projection of additional rate increases represents a sharp contrast compared with J.P.Morgan’s. Analysts of the New York-based bank estimated earlier this month that Banxico “should be near the end of its modest hiking cycle,” and the policymakers will announce a final 25bps hike on Thursday meeting. J.P. Morgan forecast that Mexico’s full-year inflation will reach 6,5%, lower that the 6.9% estimated earlier this year.



Also Relevant:

*As Latin America’s Inflation Rises, J.P. Morgan Sees Mounting Pressure to Raise Rates

*Mexico Sees Its Economy Expanding 4.1% Next Year, Morgan Stanley Has Some Doubts

*BofA Raises Latin America’s GDP Growth Forecast, Says Accelerating Inflation Will Peak in 4Q