Mexico Raises Key Rate a Third Time Amid Jump in Prices
Mexico Raises Key Rate a Third Time Amid Spike in Prices
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Mexico’s central bank raised borrowing costs for the third consecutive meeting Thursday as policy makers struggle to slow above-target inflation.
Banco de Mexico, known as Banxico, increased its key interest rate by a quarter-point to 4.75%, in a 4-1 split decision. All but one of 26 economists surveyed by Bloomberg predicted the 25 basis-point hike.
“Although the shocks that have increased inflation are expected to be transitory, due to their variety, magnitude, and the extended horizon over which they have affected it, they may pose risks to the price formation process and to inflation expectations,” the bank’s board wrote in a statement accompanying the decision.
Unlike in the previous two decisions, which were split 3-2, deputy governor Galia Borja voted for the hike this time. The bank increased its inflation forecasts, predicting a peak of 6.2% in the fourth quarter of this year and expecting it to hit 3.1% in the third quarter of 2023, instead of its previous projection of the first quarter.
“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.
Mexico’s peso pared its intraday loss to trade down 0.2% at 20.55 per dollar after the decision. The currency was poised for a fifth straight decline and its weakest on a closing basis since mid-June.
Inflationary Spiral
Consumer prices in Mexico and across Latin America have spiraled up above official targets as economies reopen to pent-up demand and snarled supply chains. At the same time, households have faced surging food and energy costs, prompting Mexico’s government to impose a cap on prices for cooking gas last month. Inflation did ease somewhat in August, but headed back up in early September toward 6%, nearly twice the central bank’s 3% target.
The central bank forecast earlier this year that inflation would rise as the economy’s rebound gained traction, and then slow again as pandemic-related disruptions proved temporary. In fact, it’s spent 15 months above target since closing out May 2020 at 2.84%.
In a separate decision, Colombia also raised its interest rate by a quarter percentage point to 2% on Thursday. It was the first increase by the Andean central bank in five years, and it comes after consumer prices rose 4.4% in August from a year earlier.
Banxico Moves
As consumer prices remained elevated and inflation expectations moved higher, Banxico in June unexpectedly raised borrowing costs for the first time since 2018 with a quarter-point hike and matched that increase in August.
The bank’s post-August decision communique and the minutes of that meeting suggested policy makers were in a data-dependent mode, but the mid-September reading reported last week showed annual inflation had jumped to 5.87% from the prior 5.60%.
Perhaps more concerning to Banxico, core prices, which include less volatile items such as tradable goods, surpassed economists’ expectations in early September and accelerated to 4.92% in comparison with a year earlier.
“Inflation in Latin America, and specifically in Mexico, is a problem of inertia,” Joan Domene, a senior economist at Oxford Economics, said before the decision. “Once you see many prices going up, expectations keep rising.”
While the bank now sees its inflation fight playing out over a longer time frame, it’s also now forecasting growth of 6.2% in 2021, which would be the fastest pace since the 1990s, after shrinking 8.2% in 2020, the most in almost a century.
Banxico Governor Alejandro Diaz de Leon will lead two more meetings of the board, in November and December, before ending his term at the end of the year. He is set to be replaced by former Finance Minister Arturo Herrera, an announcement that led to speculation about the board’s being more dovish in the future.
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