Mexico, Colombia Rate Increases Suggest More Tightening to Come
(Bloomberg) -- Mexico and Colombia boosted interest rates Thursday, with further increases likely this year as all the major economies in Latin America struggle to contain surging prices.
Banco de Mexico, known as Banxico, increased its key interest rate by a quarter percentage point to 4.75%, in a 4-1 vote. Colombia’s central bank raised borrowing costs for the first time in five years, lifting the benchmark rate by a quarter percentage point to 2%, with three of the seven board members arguing for a bolder hike.
Policy makers in Brazil, Chile and Peru, as well as Mexico and Colombia, have all been withdrawing stimulus as inflation overshoots their targets across the region.
Mexico will raise its key rate another quarter percentage point, to 5%, by the end of the year, according to the most recent survey of economists by Citigroup Inc.’s local unit, while Colombia will hike by half a percentage point to 2.5% over its next two meetings, according to the most recent survey by the central bank. Both studies were conducted before today’s decisions.
As economies eased measures to curb the pandemic, pent-up demand pushed prices higher across both emerging and developed markets, while consumers were also hit by higher global food and energy costs.
Central banks in rich nations have held off on policy tightening for now on the expectation that much of the recent jump in consumer prices will prove transitory. Latin American countries, in contrast, have begun to withdraw stimulus for fear that temporary price rises could become more permanent as businesses incorporate expectations of faster inflation into price-setting decisions.
With Colombia’s decision Thursday, all major inflation-targeting central banks in Latin America have raised interest rates this year, even as the economy and the jobs market are still recovering after the pandemic.
What Bloomberg Economics Says
“In Colombia the central bank just started a tightening cycle because it needs to reduce stimulus. It is poised to continue increasing interest rates this year and next. In Mexico the outlook is different, the rate there is already close to neutral and the bank is hiking to anchor inflation expectations, not because there is excess stimulus. For now inflation risks are still biased to the upside so there is a high probability of more hikes, but it depends on the data.”
-- Felipe Hernandez, Latin America economist
Beyond the policy and economic implications of accelerating inflation across the region, it’s also rapidly becoming a pressing political issue as it cuts in into household budgets.
A surge in the price of cooking gas has put a big dent in the disposable incomes of poorer households, posing a threat to the popularity of governments across the region. Six price rises by state-owned oil company Petroleo Brasileiro SA, or Petrobras, have hurt the popularity of Brazilian President Jair Bolsonaro, while in Mexico, President Andres Manuel Lopez Obrador recently imposed price caps on cooking gas.
Unlike in the previous two Banxico decisions, which were split 3-2, deputy governor Galia Borja voted for the hike on this occasion.
“With the inflation expectations increase and with four of five members of the board voting for the hike this time, the probability of another hike this year increases,” said Gabriela Siller, director of economic analysis at Grupo Financiero BASE.
Although Colombia’s decision was in line with expectations, it can be viewed as a “hawkish hike” given that three board members voted for a rate rise of half a percentage point, while the central bank also revised upward its forecasts for growth and inflation, said Alejandro Cuadrado, head of Latin America currency strategy at Banco Bilbao Vizcaya Argentaria in New York.
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