The Day at a Glance | Sep 29 2022

he Top

*Banxico is expected to increase the interest rate to 9.25% this afternoon.

*Russia set to proclaim annexation of seized Ukrainian territory after referendums in Lugansk, Donetsk, Kherson and Zaporizhia.

*Inflation in Spain decreased more than expected during September (9.3% annual vs 10%e.).

*Liz Truss defends that her plan to cut taxes in the United Kingdom is the right road to take; British Pound fell 1%.

*The FED must continue increasing interest rates despite the volatility in global financial markets: Charles Evans, Chicago FED.

*Germany warns that greater efforts will be necessary to decrease demand for gas and maintain inventories high before winter.

Economic environment

Banxico decision. The Central Bank of Mexico´s Governing Board will hold a monetary policy meeting today. The bank is expected to increase the target interest rate in 75 base points to take it to 9.25%, its highest level since it uses this monetary tool to reach an inflationary target. If the interest rate is increased as expected, this would be the third consecutive 75bp increase on behalf of Banxico, who started an increasing rates cycle in June of 2021 to contain inflationary pressures triggered by the pandemic and the conflict in Ukraine. With today´s decision, Banxico would have increased the interest rate 525 base points in the last 15 months, and the differential interest rate with the United States would return to 600bp, its highest level since 2008. Today´s decision will be particularly important to understand the members´ stance regarding the need to maintain the same pace in rate hikes as the United States Federal Reserve; if Banxico doesn’t stop doing so, the rate could reach 10.5% by the end of the year. Only some members (Gerardo Esquivel) have argued in favor of steering away from the FED´s restrictive cycle, which could lead to a majority decision to break the Governing Board´s consensus in one of the following meetings. However, given the most recent underlying inflation figure, its trend, and how effective it´s been to maintain a differential rate with the United States to keep the exchange rate anchored and achieve an effective monetary policy transmission, it´s highly likely that Banxico will continue carrying out rate hikes until it exceeds the 10% level by the end of 2022.