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Markets might have overreacted by pricing several more interest rate increases after Mexico’s central bank unexpectedly raised borrowing costs on Thursday, Deputy Governor Gerardo Esquivel said.
The bank increased its target rate for the first time since late 2018, hiking by a quarter point to 4.25% in a split decision. Markets were pricing 131 basis points in further hikes on Friday morning.
“It could be an overreaction to this particular event,” Esquivel said in an interview Friday with Bloomberg News, speaking of the market response. “The statement was careful precisely not to suggest that this was necessarily the start of a tightening cycle.”
The peso erased earlier gains and fell 0.1% to 19.8741 at 1:24pm in Mexico City.
If inflation “is more or less in line with what we expect, I don’t think there’s reason to necessarily anticipate additional hikes,” he said, explaining that the board is now projecting higher inflation than forecast in its last quarterly report.
The bank expects inflation to slow gradually in the third quarter, before accelerating again at the end of the year, he said. Annual price increases may remain above 5% for much of the year, but that would still be within central bank expectations, he said. Inflation has continually surprised the bank and economists this year, surging to more than double the 3% target in April and refusing to ease significantly since then.
More interest rate increases run the risk of harming Mexico’s nascent economic recovery, he added.
“Undoubtedly a rate hike always has this implication that it can have a negative effect,” he said. “Perhaps only a quarter-point rise isn’t that drastic but additional increases could have this implication.”
While the hike was aimed at taming inflation expectations, Esquivel said he thinks most inflation shocks have passed.
“Very significant shocks in prime materials have taken place that in some way have started to be contained,” he said. “There was a significant rise in fuel prices that is also beginning to be contained.”
MEXICO REACT: No Tightening Cycle, But Additional Hikes Possible
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