Mexico Maintains Pace of Interest Rate Hikes: Decision Guide

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Mexico’s central bank is expected to make its third straight half-point interest rate hike since December in a bid to rein in inflation, which is at the fastest pace in nearly two decades.

Banxico, as the central bank is known, is expected to raise borrowing costs by 50 basis points to 6.5% on Thursday, according to forecasts from all but one of 24 economists polled by Bloomberg.

The Remaining Economist expects the bank to raise the rate by 75 basis points, which would be Mexico’s biggest increase since at least 2008, when the current inflation targeting system was adopted.

Latin American central banks raised rates more aggressively in response to above-target inflation. In Mexico, consumer prices rose 7.28% last month from a year earlier, more than double the 3% target. Core inflation, which excludes volatile items like fuel, hit its highest level in over 20 years.

What Bloomberg Economics says

“The deteriorating inflation outlook suggests that policymakers may be considering a larger adjustment. Most may still prefer just 50 basis points – enough to raise the real rate and more than offset rising US interest rates, while leaving room for new changes and limiting headwinds on the business.

— Felipe Hernandez, Latin American economist

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Banxico will release its decision at 3 p.m. ET, along with a statement from its board of directors.

Growth issues

Mexico is facing the lowest rate of new coronavirus infections since the pandemic began in 2020, a promising sign, the health ministry said on March 22. But it continues to be plagued by supply chain issues and a weak service sector, leading to a lower exit.

Growth forecasts for 2022 – which now stand at 2%, according to a Citi survey – could force the central bank to choose whether to prioritize inflation, as required by its mandate, or to adopt a more restrained approach in the face of fears that aggressive policy could further slow the economy.

New Governor

Since Victoria Rodriguez Ceja took over as the new central bank governor in January, Banxico’s decisions have come under even greater scrutiny. Rodriguez, who worked for years in the federal government as a budget official, voted with a majority of the bank’s board members in February and pledged to preserve the bank’s autonomy.

Yet her last-minute selection by Chairman Andres Manuel Lopez Obrador still raises fears that she could stray from the bank’s traditionally hawkish message.

“The inflation problem is a global phenomenon,” said Jessica Roldan, chief economist at Casa de Bolsa Finamex. “But Banxico can’t ignore what inflation looks like locally. It’s very sticky. Once it reaches high levels, it takes a long time to come down.

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