Mexico Central Bank to Keep Prudent Stance, Governor Says
Mexico’s central bank needs to be cautious on inflation given how unpredictable the Covid-19 crisis has been and will keep a prudent monetary stance going forward, Governor Alejandro Diaz de Leon said in an interview.
Banxico, as the central bank is known, anticipates that price shocks are of a transitory nature and largely due to the impact from the virus, said Diaz de Leon on Thursday, hours after the bank’s five-person board hiked interest rates a quarter-point for the second consecutive meeting. The decision was meant to avoid a deterioration in inflation expectations and price formation, Diaz de Leon said during the telephone interview.
“We are mindful of inflation dynamics,” Diaz de Leon said. “We know that they are transitory in nature, but Covid has been a crisis like no other, with peculiarities like no other, so we need to be cautious. That’s why we want to run a prudent monetary stance.”
The central bank board boosted key interest rates to 4.5% on Thursday, leading some economists to predict a tightening cycle through December. They’ve pointed out that since consumer prices have remained stubbornly close to double the bank’s 3% target, the board may keep increasing borrowing costs.
The governor declined to comment on future rate decisions.
MEXICO REACT: More Hikes to Come After Inflation Forecast Lift
The bank now expects annual inflation to end the year at 5.7%, up from its June forecast of 4.8%. Looking ahead, Banxico sees annual price increases decelerating to 3.4% by the end of 2022 and to 3.1% in the first two quarters of 2023. Prices have been driven up by supply shocks, food and energy inflation and recovering domestic demand.
Diaz de Leon will step down at the end of his term in December, and President Andres Manuel Lopez Obrador nominated former Finance Minister Arturo Herrera to replace him.
The change in constituents could alter the decisions of the board, which has maintained a 3-2 division in the last two meetings, with members Galia Borja and Gerardo Esquivel opposed to tightening. Herrera expressed dovish leanings twice last month, fueling speculation that he may take a more tolerant approach toward inflation, which has been running close to 6% since April.
Diaz de Leon, who voted in favor of Thursday’s decision, said that the divisions within the board reflect different views about the risks and challenges faced by the Mexican economy.
“We all have different views, concerns, and trade-offs,” he said. “That is why it is very important that we have a decision done by a board.”
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