Mexican STIRS Price Upside Rates Risk

Latin America’s economies have been hard hit by the pandemic, and Mexico is no exception (Figure 1). As of Q1 2021, Mexico’s economy remained about 4% smaller than it was before the pandemic, with a sharp rebound in Q4 2020 followed by much slower growth in the first quarter of this year. While certain aspects of Mexico’s economy, such as its industrial sector, have done well, services such as tourism have been severely disrupted.

Figure 1: Mexico’s economy remains about 4% smaller than it was pre-pandemic

Mexico’s economy was in a recession even before the pandemic struck. Between late 2015 and late 2018, Bank of Mexico, the central bank, raised rates from 3% to 8.25%, which probably contributed to a sharp slowdown in Mexico’s pace of growth. Unemployment remains at around 4.5%, about 1% higher than it was before the pandemic and about 1.25% higher than it was at its 2018 low (Figure 2).

Figure 2: Mexico’s unemployment rate is about 1% higher than pre-pandemic

Bank of Mexico began cutting rates before the pandemic, lowering them to 4%. Inflation seems to have given the central bank cause for not lowering them any further. Mexico’s core inflation has now crept above the central bank’s overnight rate for the first time since early 2015 (Figure 3).

Figure 3: Mexico’s core rate of inflation has crept above Bank of Mexico’s overnight rate

South of its border, Brazil’s central bank has found itself in an analogous situation. It too saw core inflation rise above its policy rate. Negative real interest rates have been common in Europe and the U.S. since the global financial crisis of 2008 but are still unusual in emerging market economies where inflation rates have not fallen as low. Faced with negative real rates, Banco Central do Brasil joined Russia’s central bank as one of the first major central banks to tighten interest rate policy since the pandemic began (Figure 4).

Figure 4: Banco Central do Brasil recently tightened policy in response to negative real rates

Interest rate traders price some risk of Bank of Mexico going in the same direction as Banco Central do Brasil. An implied forward curve of short-term interest rates (STIRS) calculated from Mexican 28-day, 91-day, 180-day and 360-day T-Bills suggests a 50-50 likelihood that Bank of Mexico will begin tightening policy in the next three months. However, Mexico’s interest rate markets imply that traders assume the central bank will have hiked rates by as much as 50 basis points (bps) above current levels between August and October 2021. Furthermore, those same interest rate markets imply a likelihood that interest rates will average about 100 bps higher than current levels between November 2021 and April 2022 (Figure 5).

Figure 5: Mexico’s interest rate markets imply that Bank of Mexico will likely tighten policy

There are both upside and downside risks to Mexico’s interest rate curve.

Upside risks to rates include:

  1. Demand for industrial products remains extremely strong around the world (Figure 6), and 72% of Mexico’s exports are manufactured items, of which 75% head to the U.S. and Canada.
  2. High saving rates and increased household wealth in the U.S., Canada and Europe could fuel a surge in tourism to Mexico as and when the pandemic subsides (Figures 7 and 8).
  3. Increasing bottlenecks in supply chains and soaring commodity prices could increase inflation further.

Figure 6: U.S. retail sales are soaring amid stimulus/lack of spending on services sector

Figure 7: High U.S. savings rates may imply pent-up demand for experiences like Mexican vacations

Figure 8: Unlike during the 2008 crisis, U.S. household net worth has soared during the pandemic

Downside risks include:

  1. The Mexican peso is relatively strong compared to its Latin American peers and has recovered most of its losses versus the U.S. dollar recorded early in the pandemic (Figure 9).
  2. A stronger currency will likely put a damper on inflation.
  3. Mexico’s yield curve, while is positively sloped, is among the flattest in Latin America and therefore appears to be among the least optimistic regarding the prospects for near-term growth (Figures 10 and 11). This also suggests that markets may not believe that Bank of Mexico has a great deal of latitude to raising rates further.
  4. Mexico still has a high rate of COVID-19 infections.

Figure 9: Mexico’s currency has been the strongest in Latin America

Figure 10: Mexico has the flattest/least optimistic yield curve in Latin America

Figure 11: Yield curve slope correlates positively with subsequent growth across the region

Bottom Line:

  • Mexico’s economy remains 4% smaller than it was pre-pandemic
  • Traders anticipate that Bank of Mexico may start hiking rates later this year
  • Mexico’s core inflation rate has crept above Bank of Mexico’s overnight rate
  • Mexico’s manufacturing sector is very strong, but tourism has suffered
  • The Mexican peso remains the strongest currency in Latin America


All examples in this report are hypothetical interpretations of situations and are used for explanation purposes only. The views in this report reflect solely those of the author(s) and not necessarily those of CME Group or its affiliated institutions. This report and the information herein should not be considered investment advice or the results of actual market experience.

About the Author

Erik Norland is Executive Director and Senior Economist of CME Group. He is responsible for generating economic analysis on global financial markets by identifying emerging trends, evaluating economic factors and forecasting their impact on CME Group and the company’s business strategy, and upon those who trade in its various markets. He is also one of CME Group’s spokespeople on global economic, financial and geopolitical conditions.

View more reports from Erik Norland, Executive Director and Senior Economist of CME Group.

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