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Mexico’s central bank is seen holding its key interest rate at a five-year low, as policy makers expect that recent price shocks will prove to be transitory.

The bank, known as Banxico, unanimously voted to keep borrowing costs at 4% in its last two meetings, after inflation hit 5.9% in May — far above the bank’s 4% target ceiling. All of the 23 economists surveyed by Bloomberg expect the bank to hold the key rate unchanged again Thursday.

“Nothing is going to change, not in the decision, not in the rate, not in the unanimity, not in the statement,” said Jessica Roldan, chief economist at Casa de Bolsa Finamex SAB. “It’s just going to demonstrate that the bank is waiting to see how inflation data evolves in the next few months.”

Thursday’s decision will be published on the central bank’s website at 1:00 p.m. local time in Mexico City, together with a statement from the bank’s board. These are the most important points investors will be focusing on:

Rate Guidance

The bank will likely remain data dependent, rather than giving forward guidance, said Pamela Diaz Loubet, an economist at BNP Paribas SA, who will be watching to see if it changes its current expectation that inflation will hit the 3% target in the second quarter of 2022.

MEXICO PREVIEW: Banxico to Hold Rate Amid Regional Hike Pressure

Mexico’s TIIE swap curve is pricing around 70 basis points in hikes this year, beginning with a 25-basis-point hike in September. Economists surveyed by Citibanamex in a poll published Tuesday saw a quarter-point hike taking place in November.

Inflation Drivers

The nature of the climb in prices, which has been driven largely by supply shocks and external pressures, means a rate hike would have little impact on inflation while potentially jeopardizing the economic recovery, said Diaz Loubet.

“The capacity of monetary policy to react to supply shocks is more limited than to demand shocks,” she said. “An early hike without stronger evidence of recovery in sectors like tourism, restaurants and even retail could hinder the recovery process without necessarily containing inflation.”

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What Bloomberg Economics Says

We expect Banxico to hold its benchmark rate at 4.0%. Higher interest rates, tighter fiscal policy and a weaker economic recovery in Mexico relative to peers suggests Banxico has more flexibility than central banks that have already announced some tightening. High inflation should be transitory but any additional surprises after the central bank sharply increased its forecasts earlier this month are likely to force policy makers to hike rates. If necessary, a hike would not be the start of a tightening cycle but rather isolated adjustments in response to new data.

–Felipe Hernandez, Latin America economist

Consumer prices have only slowed slightly since hitting a three-year high of 6.1% in April. While inflation is expected to ease throughout the year, it could be a “major problem” if it keeps coming in higher than Banxico’s forecasts in the coming months, Roldan said.

Growth Outlook

Mexico’s economy shrank 8.2% last year, the most in almost a century, and the bank’s easing has provided the only substantial form of economic stimulus during the crisis. The economy has rebounded faster than expected this year, adding to inflationary pressures, with the bank projecting 6% growth in 2021.

Thursday’s decision will be the first since President Andres Manuel Lopez Obrador nominated Finance Minister Arturo Herrera to become Banxico governor when current leader Alejandro Diaz de Leon steps down at the end of the year. Diaz de Leon said last week he has a “close relationship” with his successor.

The nomination of Herrera, who as finance minister attends Banxico board meetings, won’t affect the decision made by the autonomous body, said Priscila Robledo, an economist at Continuum Economics.

However, the fact that analysts see the bank staying on hold for months to come shows the bank’s traditionally conservative outlook has shifted since Lopez Obrador’s nominees took the majority of the five-person board in January, Robledo argued.

“With the previous composition of a few months ago, we would probably have some signals that a tightening is coming” at some point, she said.

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