Mexico and Colombia Set for More Rate Hikes: Decision Day Guide
Mexico and Colombia Set for More Rate Hikes: Decision Day Guide
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Mexico and Colombia’s central banks are expected to increase interest rates again, as inflation accelerates throughout Latin America, the region with the highest average cost-of-living increases this year.
Mexico’s central bank on Thursday will boost its benchmark rate by a quarter-percentage point to 5.25%, according to 17 of 25 economists surveyed by Bloomberg, with the remainder expecting a half-point increase. On Friday, Colombia will hike its borrowing costs by a half-point to 3%, 22 of 25 analysts have predicted.
Every major inflation-targeting central bank in Latin America has been withdrawing monetary stimulus in recent months to curb above-target price rises as their economies rebound from the pandemic. Brazil last week delivered its second-straight rate increase of 1.5% percentage points while Chile on Tuesday took its borrowing costs to the highest level since 2014.
Mexico: Fifth Straight Increase
- Current rate: 5%
- Decision time: Thursday, 2 p.m. ET
Mexican inflation soared to its highest point in 21 years in early December, even as the country’s central bank has steadily boosted rates by a quarter point in each of its last four meetings.
Each decision has been split, with Deputy Governor Gerardo Esquivel insisting that there’s little the bank can do to tackle price increases driven by global supply chain issues. Meanwhile, at the last meeting one board member said a half-point hike was needed, but held off voting for one to avoid market distemper.
November’s unexpected inflation spike to 7.37% -- more than twice the central bank’s target rate -- has some economists forecasting a half-point increase, but most expect policy makers to continue their cycle of gradual tightening.
“They’re afraid to hike 50 basis points because they don’t want to go overboard,” said Valeria Moy, director of the Mexican Institute for Competitiveness think tank. “The probability they bring themselves to hike by 50 isn’t zero, but I think in the end they’ll go for 25.”
Thursday’s meeting will be the last before Governor Alejandro Diaz de Leon steps down, leaving the bank in a period of uncertainty. Diaz de Leon, the very image of the cautious, pragmatic central banker, will be replaced with Mexico’s low-profile former budget spending chief Victoria Rodriguez Ceja.
Rodriguez, who has no monetary policy experience, takes over amid this century’s worst inflation crisis -- just as the economic recovery is grinding to a halt.
“The economy will probably enter into a recession in the fourth quarter of this year,” said Rodolfo Navarrete, the head of analysis at Vector Casa de Bolsa. “That’s generating a certain amount of worry, and it has to be part of the monetary policy decision.”
Colombia: Third Straight Hike
- Current rate: 2.5%
- Decision time: Friday, 1 p.m. ET
Colombia’s central bank is expected to hike for the third straight time, after annual inflation accelerated to 5.26% last month, its fastest pace in nearly five years.
The central bank stepped up the pace of tightening in October, boosting its rate by a half point, after making its first hike in five years in September. Most analysts see it hiking by a half point again, with no sign of its normalization cycle ending, while three economists forecast even faster increases.
What Bloomberg Economics Says
We expect the central bank to increase its benchmark rate by 50 basis points to 3% and keep the door open for more. Interest rates remain low -- consistent with expansionary monetary conditions -- but high inflation, mounting price pressures and accelerating inflation expectations support increasing rates.
-- Felipe Hernandez, Latin America economist
-- Click here for the full report
Pent-up demand has fueled price increases after authorities eased curbs on movement, while higher global food and energy inflation have pushed up costs paid by consumers.
Unlike Mexico, Colombia’s economy seems to be firing on all cylinders. Central bank chief Leonardo Villar said last month that “the worst of the crisis is over.” The country’s economy beat expectations in the third quarter, growing slightly over 13% from a year earlier.
“Not only is it over, but we are in a recovery process that has been so fast that the level of activity is already above the pre-pandemic level,” Villar said.
The bank forecasts that gross domestic product will expand at its fastest pace in at least five decades this year. The recent rally in prices for major Colombian exports, like oil, coal and coffee, is helping drive the rebound.
©2021 Bloomberg L.P.