Inflation dynamics have Mexico set to hike rates next

Our thorough analysis of inflation risks shows that Mexico should be the first to join Brazil in the rate-hiking club in 2021. With three in four items in the CPI basket seeing above-target price rises and US long-term rates climbing, we think Banxico will be compelled to raise rates before year-end.

What you will learn:

• Outside Brazil and Mexico, the inflation outlook looks quite benign, so we think rate hikes are more of a 2022 story in Chile, Peru, and Colombia.
• However, on-target inflation is no guarantee that central banks will stand pat. In Colombia, if the rise in long-term bond yields and currency weakness are not reversed soon, BanRep may be forced to hike rates even though inflation is below the lower bound of the target range and expectations are well-anchored.
• We also note that consensus expectations are typically a poor guide for future price dynamics, so central banks respond to both observed and expected inflation.