Mexico: Sharply higher inflation adds to thelist of central bank concerns.

In the firsthalf of January,headline CPI rose much more than expected in Mexico,up 1.51%M vs 1.27%M consensus. On an annual basis, inflation surged to 4.78%, its highest level since September 2012,and substantially higher than the central bank’s 3% midpoint target. The culprit was higher energy prices – on the back of gasoline price liberation that kicked in at the beginning of the year – as well as pass-through to inflation from the depreciation of the MXN. Such price pressures offer Banxico very little room for maneuvering,at a time when Mexico is already facing extreme uncertainty from the north. We see the central bank restricting monetary policy further in its February 9 meeting and expect another 50bp, taking the Fondeo rate to 6.25%. While such a move is already increasingly priced in and local rates are arguably cheap, we stay cautious in the near term on the back of no positive anchor yet in place.