Mexico and Peru Weigh Interest Rate Rises: Decision Day Guide

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Mexico and Peru are considering raising interest rates on Thursday as policy makers across emerging markets try to head off faster inflation in economies rebounding from the pandemic.

Mexico’s central bank will increase its policy rate by a quarter-percentage point according to all 21 analysts surveyed by Bloomberg. Economists are split over whether Peru will follow suit and raise borrowing costs for the first time in five years, or keep its key rate at a record low of 0.25%.

Inflation has accelerated in emerging markets from India to Russia to South Africa in recent months, as companies pass on higher commodity prices to consumers, and demand picks up before supply chains are fully recovered from the pandemic. Elsewhere in Latin America, Brazil has raised its policy rate by 3.25 percentage points this year, Chile lifted its rate last month, as did Uruguay on Wednesday. Colombia’s central bank indicated that it may soon join the regional trend.

Mexico: Second Hike

  • Current rate: 4.25%
  • Time of decision: 2 p.m. ET

Mexico’s central bank, or Banxico, stunned markets in June by unexpectedly raising rates for the first time since 2018. Board member Jonathan Heath said the bank was forced to act after it “screwed up” its inflation forecast.

Mexico and Peru Weigh Interest Rate Rises: Decision Day Guide

The bank is forecast to raise the rate to 4.5% at Thursday’s meeting. Consumer prices rose 5.8% in July from a year earlier, nearly double the bank’s 3% target.

Inflation pressure is high enough that there’s even a chance that Banxico will accelerate the pace of rate increases to half a percentage point, though a quarter-point rise is more likely, said Gabriela Siller, director of economic analysis at Grupo Financiero BASE.

Mexico’s economy shrank the most in almost a century in 2020, but has rebounded faster than expected this year, allowing Banxico to start paring stimulus.

Starting Thursday, the bank will publish updated inflation forecasts in statements accompanying rate decisions, which will also note how each of the five board members voted.

Peru’s Political Turmoil

  • Current rate: 0.25%
  • Time of decision: 7 p.m. ET

Peru’s currency has depreciated the most in emerging markets since President Pedro Castillo took office last month and then shocked investors by appointing radical leftists to his cabinet.

The weaker sol is likely to boost inflationary pressure, which was already growing. Inflation last month accelerated further beyond the 3% upper limit of the central bank’s target range, to 3.8%.

Even so, the economy has struggled with output that remains below its pre-pandemic level, and some analysts believe that a withdrawal of stimulus would be premature.

What Bloomberg Economics Says

“Political noise and market volatility remain high. The currency has depreciated more than 3% since the July meeting and more than 16% in the past 12 months. The results point to ongoing capital outflows, raise concerns about financial stability and reduce policy flexibility.”

-- Felipe Hernandez, Latin America economist

Click here for the full report.

Of seven analysts surveyed by Bloomberg, four expect the central bank to leave its key rate unchanged; two expect a quarter-percentage point increase, and one is forecasting a rise of half a percentage point.

“Peru has not suffered an inflation shock similar to Mexico’s. This allows its central bank to be on hold for at least one more meeting,” said Alonso Cervera, chief Latin America economist at Credit Suisse Group AG.

He expects Peru’s central bank to signal that it could begin monetary tightening in the near future.

A rate increase could help stem capital outflows amid the political uncertainty, by making local assets more attractive as peers in the developing world raise their interest rates, too.

“If Castillo continues to go down this path, you could see capital flight, you could see a burn of foreign currency reserves,” said Aaron Gifford, an emerging-market sovereign analyst at T. Rowe Price Group in Baltimore.

©2021 Bloomberg L.P.

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