(Bloomberg) — Bond investors’ expectations for Mexico’s inflation are the highest in at least a decade and may continue to rise unless the central bank delivers a dovish message in its monetary policy decision on Thursday.
Two-year breakeven inflation rates, a proxy for trends in the consumer price index according to traders, have risen 1.3 percentage points this month as price pressures mount around the world. They now stand at around 5.3%, the highest level since at least 2012, when the data first came out.
Inflation expectations worsened, despite swap traders increasing their bets that the central bank will raise interest rates more aggressively. The curve now shows more than 3 percentage points of gains through the end of the year, down from less than 2 percentage points before the war between Russia and Ukraine sparked a sharp rebound in global oil and commodity prices.
“We believe Banxico will err on the hawkish side to minimize long-term risk,” JPMorgan Chase & Co. economists Steven Palacio and Gabriel Lozano wrote in a note Monday. “At this point, letting down our guard could be the worst mistake of a central bank,” he said in a report on Friday.
Market prices suggest the central bank’s key rate, currently at 6%, will rise above 9% by the end of this year, compared with the median projection of 7.75% according to a Citibanamex survey published on Tuesday. Until then, there are seven meetings scheduled, including this week’s, which means there is little room for the bank to slow its current pace of 50 basis point hikes if it is to meet traders’ expectations.
The movement of all swaps tasks and inflation expectations as bets are raised for Banxico’s policy announcement on Thursday. Although officials are widely expected to hike rates by half a percentage point, a dovish message will likely push yields and breakevens higher still.
Mexico’s monetary policymakers offered little forward guidance on their outlook for rates under new Governor Victoria Rodríguez. Last month, the central bank chief reassured investors by aligning herself with the majority of the board in announcing the bank’s second straight half-percentage-point hike, but gave no indication of next steps to rein in the country’s biggest inflation problem. in two decades.
The inflation rate of more than 5% implied by the bond market suggests that investors are more concerned than the central bank about rising prices. Banxico’s latest forecasts were inflation at the rate of 2023 at 3.1%, for the real amount of 7.3%. Economists are slightly less optimistic, estimating consumer price increases to be around 4% by the end of next year, according to Tuesday’s Citibanamex survey.
According to a Friday note from Citigroup analysts led by Adrián de la Garza, inefficient government policies, a less competitive business environment, enduring global price pressures and general price inertia significantly push inflation projections below 4% a large square “are simply unreal”.
Bond Traders Seek Banxico Guarantees as Inflation Outlook Rises
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