USDMXN Muted After Banxico Meets Expectations with 75 bp Hike

• Banxico raises the overnight rate by 75 basis points to 8.5%, as expected
• The aggressive tightening comes after inflation reached its fastest pace in 21 years
• The USD/MXN reaction is muted as decision was already priced–in

Mexico’s Central Bank (Banxico) continued its aggressive tightening cycle at its August monetary policy meeting following in the Fed’s footsteps, raising interest rates by 75 basis points to 8.50% by unanimous vote. This marks the second consecutive hike of this magnitude. The Central Institution has been increasing borrowing costs at every meeting since June 2021, delivering 450 basis points of tightening in total and bringing its policy rate to a record level to tame soaring inflationary pressures.

For context, headline CPI hit 8.15% in July, the fastest pace since December 2001 on the back of soaring energy costs and despite the government’s best efforts to implement generous fuel subsidies and other price controls, such as pacts with major food producers.

The consumer price outlook has been deteriorating in recent months, causing Banxico to severely miss its inflation target of 3.00%, plus minus one percent. Prospects are not getting better just yet.The latest estimate still projects the CPI to converge to the target until the first quarter of 2024 and forecasts for the first half of 2023 were revised upwards.

In today’s statement, the bank maintained a worrisome tone about current macro conditions, noting that the balance of risks for the trajectory of inflation within the forecast horizon is biased significantly to the upside and the Board will keep assessing the magnitude of future rate adjustments based on prevailing conditions.

BANXICO INFLATION FORECASTS

Source: Banxico

USD/MXN REACTION

Since the release of better-than-expected figures of CPI and PPI in the US that contributed to the recent softening of the USD, the MXN has appreciated and touched levels not seen in six weeks. But today’s interest rate decision didn’t trigger any bullish MXN reaction as the decision was already priced in by investors.

USD/MXN CHART

USD/MXN chart prepared in TradingView

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—Written by Cecilia Sanchez-Corona, Research Team, DailyFX

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.