The Central Bank of Mexico hiked rates 50bps to 6.25% (as expected) and sent the peso rallying modestly. As Bloomberg notes, Banxico appears more concerned at inflationary pressures than growth slowdown.

Mexico Central Bank Issues Statement Following Rate Decision:

• Banxico to Closely Watch Mid, Long-Term CPI Expectations
• Banxico to Watch Potential FX Pass-Through to CPI
• Banxico to Continue Watching Policy Posture vs U.S. Fed
• Banxico to Closely Monitor Gasoline Prices

The peso is rallying modestly.

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The hike comes hours after Mexico reported that consumer prices soared by 1.51% mom during January, driven mostly by higher gasoline and cooking gas prices, and also higher urban public transportation tariffs, as a result of the gasoline price hike. Combined, these items added 126bp to headline inflation. In addition, core prices continue to be under pressure, with a high print in core-goods (both food and non-food). Inflation would have been even higher were it not for the sharp decline in perishable food prices (fruit and vegetables: -3.60%, compared with +6.98% during the same period a year ago).

Annual headline inflation accelerated to 4.72% yoy, up from 3.36% during Dec. However, headline inflation moderated to 4.66% yoy during 2H Jan from 4.78% yoy during 1H Jan. With the high Jan print, annual core inflation rose to 3.84%, from 3.44% in Dec. Overall, core-goods inflation is now tracking at 4.75%, up from 2.86% a year ago, with inflation among core-goods food/beverages/tobacco doubling to 5.27% from 2.59% a year ago. This is a sign of accelerating pass-through pressures from currency weakness. The acceleration of core food prices constitutes a regressive tax on low-income households that could jeopardize the buoyancy of private consumption. In addition, core-services inflation rose to 3.07% yoy during Jan.

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As Goldman adds, the recent inflation figures suggest a deterioration of the inflation outlook, and some generalization of inflationary pressures.

The sharp MXN depreciation during the last 12 months and recent upward move in inflation expectations added upside risk to the inflation outlook in spite of the loss of growth momentum, and explains today's rate hike.

However, going forward, in the calibration of monetary policy the central bank should also be mindful of the fact that the economy, and particularly confidence indicators, is weakening (which implies no demand-pull pressures on inflation over the forecasting horizon) and as rates continue to rise the impact on real activist and employment starts to become more visible and costly. Furthermore, the MXN has shown some signs of stability (to mild strengthening) in recent weeks, and most of the recent surge in inflation derives from lagged FX pass-through and a shock to administered prices.