The Mexican Central Bank, Banco de México raised rates for the 10th consecutive rate increase since June of 2021 and second straight by 75 basis points to 8.50% matching the previous two interest-rate moves by the U.S. Federal Reserve. The bank again increasing its forecasts for headline and core inflation forecasts. The size of future rate increases will depend on prevailing conditions, the bank added.
Banco de México’s Governing Board decided to raise the target for the overnight interbank interest rate by 75 basis points to 8.50%, effective August 12, 2022.
“For the next policy decisions, the board intends to continue raising the reference rate and will evaluate taking the same forceful measures if conditions so require,” the bank said in a post-meeting statement after its ninth hike in a row.
The vote was unanimous. Voting in favor of the decision were Victoria Rodríguez, Galia Borja, Irene Espinosa, Gerardo Esquivel, and Jonathan Heath.
The move follows the U.S. Federal Reserve’s hike last week of three-quarters of a percentage point, its largest increase in more than 25 years. Policy makers in regional powerhouse Brazil raised rates to 13.75% and penciled in another hike for September.
Highlights
- It was the 10th consecutive rate increase since June of 2021 and second straight three-quarter point rise
- Highest level since the Banco de México adopted the interest-rate target in 2008.
- Mexico’s inflation stood at 8.15% at the end of July, its highest level since December 2000. The core consumer-price index, which excludes energy and agricultural products but includes processed food, rose to 7.65%, also a more than 21-year high.
- The bank noted the Fed’s two consecutive three-quarter point increases in the federal-funds rate and rate increases by a large number of other central banks. The size of future rate increases will depend on prevailing conditions, the bank added.
Inflation Forecast
The Banco de México’ raised its inflation forecasts through the third quarter of 2023, but said it still expects inflation to return to its 3% target in the first quarter of 2024. It estimates inflation will average 8.5% in the third quarter of this year before beginning to ease gradually in the fourth quarter.
Expectation for another hot inflation reading out of Mexico with the headline number seen hitting a new 21-year high near 8.7% while the core reading pushes past 8%.
Market Reaction
The Mexican peso gave back some gains in the wake of the rates decision, trading at 19.98 against the U.S. dollar versus 19.92 earlier in the day.
Goldman Sachs’s chief Latin America economist Alberto Ramos said in a note. The central bank statement was “slightly more dovish” that the previous one, “In our assessment, the case for a follow-up 75 basis-point rate hike in September would have to be supported by additional negative inflation surprises and further deterioration of inflation expectations, alongside a hawkish Sept. 21 FOMC decision and guidance,”
Banco de México Monetary Policy Statement August 11, 2022
Banco de México’s Governing Board decided to raise the target for the overnight interbank interest rate by 75 basis points to 8.50%, effective August 12, 2022.
World economic activity weakened during the second quarter and recent indicators suggest that said
weakness would persist during the third quarter. Inflation continued increasing, in some cases reaching
once again levels unseen in decades, in an environment where unbalances between demand and supply
in diverse markets and high levels of food and energy prices persist. This continues generating
expectations of a fast withdrawal of monetary stimulus worldwide.
Financial conditions remained tight while the dollar continued gaining strength. In its latest monetary policy decision, the Federal Reserve raised the target range for the federal funds rate by 75 basis points for a second consecutive time and anticipated future adjustments. Job creation in that country accelerated at the beginning of the third quarter and, although the latest figure on US inflation displayed a moderation, it still remains at high levels. In turn, a large number of other central banks have continued raising their reference rates, some of them at a higher-than-foreseen magnitude. Among key global risks are those associated with the pandemic, the persistence of inflationary pressures, the intensification of geopolitical turmoil, and greater adjustments in economic, monetary and financial conditions.
In domestic financial markets, the peso remained stable, while short-term interest rates increased and
long-term ones decreased. Recent information indicates that during the second quarter of 2022,
economic activity grew at a similar rate to that observed during the first quarter, thus continuing its gradual recovery, while slack conditions decreased. Nevertheless, an environment of uncertainty prevails, while the balance of risks remains biased to the downside.
The accumulated inflationary pressures associated with both the pandemic and the military conflict
continue affecting headline and core inflation, which in July registered annual variations of 8.15% and
7.65%, respectively, thus remaining at elevated levels unseen in two decades. Their expectations for
2022 rose again while those for 2023 and for the medium term increased to a lesser extent. Long-term
expectations for headline inflation remained stable, although at levels above target, while those for core
inflation increased at the margin.
In view of greater-than-anticipated inflationary pressures, forecasts for headline and core inflation were
revised upwards up to the third quarter of 2023, although convergence to the 3% target is still projected
to be attained in the first quarter of 2024.
These projections are subject to risks.
On the upside:
- i) Persistence of core inflation at high levels.
- ii) External inflationary pressures associated with the pandemic.
- iii) greater pressures on agricultural and livestock product prices and on energy prices due to the ongoing geopolitical conflict;
- iv) exchange rate depreciation; and
- v) cost-related pressures.
On the downside:
- i) a greater-than-anticipated slowdown in world economic activity;
- ii) a decline in the intensity of the geopolitical conflict;
- iii) a better functioning of supply chains;
- iv) a greater-than-expected effect from the negative output gap; and
- v) a larger-than-anticipated effect from the Policy Program to Fight Inflation and High Prices (PACIC, for its Spanish acronym). The balance of risks for the trajectory of inflation within the forecast horizon remains biased significantly to the upside
The Governing Board evaluated the magnitude and diversity of the shocks that have affected inflation
and its determinants, along with the evolution of medium- and long-term inflation expectations and the
price formation process. It also considered the increasing challenges for monetary policy stemming from
the ongoing tightening of global financial conditions, the environment of significant uncertainty, and
inflationary pressures accumulated as a result of the pandemic and the geopolitical conflict, as well as
the possibility of greater effects on inflation. Based on these considerations, and with the presence of all
its members, the Board decided unanimously to raise the target for the overnight interbank interest rate
by 75 basis points to 8.50%. With this action, the monetary policy stance adjusts to the trajectory required
for inflation to converge to its 3% target within the forecast horizon.
The Board will thoroughly monitor inflationary pressures as well as all factors that have an incidence on
the foreseen path for inflation and its expectations. This, in order to set a policy rate that is consistent at
all times, with both the orderly and sustained convergence of headline inflation to the 3% target within
the time frame in which monetary policy operates as well as with an adequate adjustment of the economy and financial markets. The Board will assess the magnitude of the upward adjustments in the reference rate for its next policy decisions based on the prevailing conditions
Source: Banco De Mexico
From The Traders Community News Desk