Mexico inflation reaches another low, should Banxico hike?

Mexico CPI increased 0.55% m/m in November, although mitigated by a decline in the CPI in the second half of the month (-0.06% 2w/2w) driven by reduction of perishable prices and lower mobile tariffs. Core inflation was also negative (-0.02% 2w/2w).  In annual terms, inflation fell to 2.16% in the second fortnight of the month from 2.3% previously. Services inflation is at 1.9% y/y.

The print is consistent with our 2.3% year-end forecast, although downside risks could dominate and inflation could end up at a lower level

"We expect inflation to jump to 2.9% y/y in January, due to base effects, but lower gasoline prices - amid the recent decline in oil prices - might push this number down further", says Barclays.

Short-term inflation expectations have declined and market breakevens are close to 3%. Unemployment has stalled and the economic recovery has not yet consolidated. Moreover, manufacturing is facing headwinds and public investment will likely not be a source of growth in the near term. Finally, the real policy rate has increased over the year, reducing the monetary stimulus and making monetary policy actually tighter.

"We view the market reaction to the long-awaited hike from the Fed will ultimately motivate the final Banxico policy action. A clear signal that the hiking cycle will be gradual in the US and that the Fed will be patient enough to bring its policy rate to neutral would allow a shallow response in the USDMXN and local rates, providing room for Banxico to wait for better domestic conditions. However, a very violent market reaction might force Banxico to react. Overall, we reiterate our view that Banxico will remain on hold next week", added Barclays.