Banxico’s New Chief Plays It Safe by Following Rate Hike Script
New governor of Mexico’s central bank, Victoria Rodriguez Ceja raises key interest rate by half a percentage point.
(Bloomberg) -- In her first decision as the governor of Mexico’s central bank, Victoria Rodriguez Ceja voted with the majority of board members to raise its key interest rate by half a percentage point, signaling that the tightening monetary policy cycle started in June might continue under her watch.
The former budget official was plucked from anonymity by President Andres Manuel Lopez Obrador in November to helm one of Latin America’s most prestigious central banks starting this year. By backing the benchmark rate increase to 6% on Thursday in a 4-1 vote, she batted away some investor concern that she would change the balance of the board toward a more dovish approach.
The rate increase matched the forecasts of 19 of 22 economists surveyed by Bloomberg, with three analysts anticipating a quarter-point hike. Along with Rodriguez Ceja -- the first female governor of the central bank known as Banxico -- three other members of the five-person board backed the decision, with Deputy Governor Gerardo Esquivel voting again for a smaller increase.
“The new Governor Victoria Rodriguez did not want to rock the boat,” Nikhil Sanghani, a Latin America economist at Capital Economics, said in a note after Thursday’s decision. “She sided with the more hawkish camp on the Board.”
Banxico is pushing ahead with its second tightening cycle in the last decade, raising the key interest rate by 200 basis points since June with hikes at each of its last six meetings. Economists now say that Mexico’s interest rate could reach as high as between 7% and 8% by the end of the year, depending on how quickly Rodriguez Ceja’s board withdraws monetary stimulus.
“With the entrance of the new governor, what this decision shows us is that there is a clear commitment to attacking inflation,” said Rodolfo Navarrete, the head of analysis at Vector Casa de Bolsa in Mexico City.
Upside Risk
Though inflation has slowed slightly from November’s two-decade high and the economy has slipped into recession amid global supply chain snarls, the annual pace of consumer price increases is still more than twice policy makers’ 3% target.
“The balance of risks for the trajectory of inflation within the forecast horizon remains biased to the upside,” the board said in a statement accompanying the decision. The bank also revised upwards its inflation estimates for the year.
Banxico has been steadily increasing borrowing costs, the first tightening cycle since late 2015 to 2018, in an effort to slow inflation that’s running above 7%. Central banks in Brazil, Chile, Peru and Colombia, facing similar surges in consumer prices, have also accelerated their tightening pace since the second part of 2021, showing less tolerance for the inflationary spike than their peers in rich countries.
More concerning still for Banxico, the closely-watched core inflation data, which is intended to track underlying trends by excluding the most volatile prices, accelerated to 6.21% in January, its highest since September 2001.
What Bloomberg Economics Says
“With no relief on prices or global monetary conditions in sight, we expect the central bank to continue increasing rates, with bigger hikes possible. Policy restrictions are similar in the rest of the region and likely to become increasingly evident as activity decelerates after strong growth in 2021.”
-- Felipe Hernandez, Latin America economist
-- Click here for full report
Economists surveyed by the central bank late last month forecast a year-end inflation rate of 4.42%, a 20 basis-point increase their forecast a month earlier, and a core reading of 4.31%, a 32 basis-point jump from the previous survey.
New Governor
Rodriguez Ceja, who took up her post just last month for a six-year term, will have to lead the central bank through this critical juncture. Her vote on Thursday’s board meeting is one of the first indications of her policy views, which remain broadly unknown beyond a public confirmation session with Mexican senators last year.
Chile also appointed a first female central bank chief, with outgoing President Sebastian Pinera tapping Rosanna Costa earlier this month.
Looking ahead, Deputy Governor Jonathan Heath last week said that from March, it’ll be hard to continue with half-point hikes at each meeting. Latin America’s second-largest economy shrank in both the third and fourth quarters of 2021 -- entering a recession -- after rebounding from an 8.2% plunge in 2020.
A further wild card for Banxico involves gauging policy moves by the U.S. Federal Reserve, which has signaled that it’ll begin to hike in March for the first time in more than three years and start shrinking its balance sheet soon after.
Perhaps more than in any other emerging market, Banxico historically tends to link its monetary policy to the Fed’s given Mexico’s geographical proximity to the U.S. and the countries’ economic integration.
“Going forward we expect in principle that the central bank mimics the Federal Reserve policy rate hikes,” said Jessica Roldan, chief economist at Casa de Bolsa Finamex. “Nevertheless, uncertainty in many dimensions is high and monetary policy decisions will continue to be data-driven.”
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