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To raise or not to raise? That is the Bank of Mexico’s dilemma this Thursday.

With inflation heading upwards, the question until now has been whether Banxico will increase by half a point – its weapon of choice, having increased by that amount six times in the last year – or a quarter-point.

Half the institutions polled by Citibanamex a week ago in its regular market survey are betting on a quarter-point increase but 41 per cent are still expecting a half-point move. But Nomura, which had been gunning for a 25 basis point move on March 30 in the Citibanamex survey, has changed its tune.

“If there was ever a window to keep rates unchanged, it would be now,” Benito Berber, Nomura analyst, said in a note to clients.

His call is based on seven factors:

1. Medium- and long-term inflation expectations are well anchored at 3.5-3.6 per cent.

2. Headline inflation looks likely to cool, in part because of a fall in US petrol prices (Mexico imports half its fuel).

3. Banxico has already increased rates faster than the Federal Reserve, or as Mr Berber said: “Banxico completed its homework assignment early, in our view.”

4. Banxico’s research staff put the neutral rate now at between 4.7 per cent and 6.3 per cent in nominal terms. The current policy rate is at 6.25 per cent.

5. Current account dynamics depend on Nafta negotiations, not on the interest rate level.

6. “The economy is not that rosy,” – that is, another increase could hurt growth.

7. Not increasing this week would enable Banxico to keep its powder dry.

That said, Banxico has been on a roll and the policy stance is not terribly tight, yet, so it could still choose to increase. Nomura is still expecting Banxico to end the year at 6.75 per cent. The market median forecast is 7.25 per cent by end-2017, according to the Citibanamex survey.

Stay tuned.

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