Mexico’s Inflation:The Odd One Out

Mexican rates have reached levels comparable to 2003 and post-GFC while inflation has also moved up to levels comparable to those times. Banxico had to respond more forcefully - de-coupling from the US cycle and the perception that it reacted mostly to the relative US/Mexico rate. Accordingly, the curve has flattened to historical lows. More recently, as the economy grew at a surprisingly fast pace in Q1 and inflation remained upbeat investors have either reduced receivers or opened payers on the view that Banxico will not be able to normalize rates at least before Presidential elections or anytime soon.