Banco de México Raises Rates Again as Inflationary Pressures Greater and Lasted Longer Than Anticipated

The Mexican Central Bank, Banco de México raised interest rates by 50 basis points to 6.00% with the bank saying Inflationary pressures have been greater and have lasted longer than anticipated. Banco Central do Brasil​ again aggressively hiked its benchmark interest rate by 1.5% to 10.75% last week.

mexico central bank

The Mexico central bank Governing Board increased the target for the overnight interbank interest rate by 50 basis points to 6.00%.

The vote was not unanimous, Voting in favor of the decision were Victoria Rodríguez, Galia Borja, Irene Espinosa, and Jonathan Heath. Voting in favor of increasing the target for the overnight interbank interest rate by 25 basis points to 5.75% was Gerardo Esquivel.

Monetary Policy Statement
Press Release
February 10, 2022

This document is provided for the reader’s convenience only. The translation from the official Spanish version was made by Banco de México’s staff. Discrepancies may possibly arise between the original document in Spanish and its English translation. For this reason, the original Monetary Policy Statement in Spanish remains the only official document.

Banco de México’s Governing Board decided to increase the target for the overnight interbank
interest rate by 50 basis points to 6%, effective February 11, 2022.

World economic activity continued recovering during the fourth quarter of 2021, although at a slower rate and heterogeneously across countries due to the evolution of the pandemic and the actions implemented by their health, monetary and fiscal authorities. World inflation continued increasing due to pressures originated by bottlenecks in production, the reallocation of spending towards merchandise, the high levels of food and energy prices, and the recovery of certain services. This generated expectations of a faster withdrawal of monetary stimulus worldwide. Financial conditions tightened, with an increase in interest rates and a slightly stronger US dollar. In its latest monetary policy decision, the Federal Reserve
announced that it will continue reducing the pace of its net asset purchases and that it will soon raise the
target range for the federal funds rate. Simultaneously, many emerging market economies continued
increasing their reference rates. Among key global risks are those associated with the pandemic,
inflationary pressures, geopolitical tensions, and adjustments in monetary and financial conditions.

In domestic financial markets, the peso appreciated, while interest rates rose, especially short-term ones.
Preliminary information shows that economic activity contracted slightly during the fourth quarter of 2021. Ample slack conditions prevailed, with significant differences across sectors.

Inflationary pressures have been greater and have lasted longer than anticipated. In January, annual
headline and core inflation were 7.07% and 6.21%, respectively. Their expectations for 2022 and 2023
increased again, while medium-term expectations decreased slightly and those for longer terms have
remained stable at levels above the target.

Forecasts for headline and core inflation were revised upwards, especially for 2022 and the first quarter
of 2023 (see table). Their annual variations are expected to converge to the 3% target by the end of the
forecast horizon. These projections are subject to risks. On the upside: i) external inflationary pressures;
ii) cost-related pressures; iii) persistence of core inflation at high levels; iv) exchange rate depreciation;
and v) increases in both agricultural and livestock product and energy prices. On the downside: i) a
greater-than-expected effect from the negative output gap; ii) social distancing measures; and iii)
exchange rate appreciation. The balance of risks for the trajectory of inflation within the forecast horizon
remains biased to the upside.

The Governing Board evaluated the magnitude and diversity of the shocks that have affected inflation
and its determinants, along with the risk of medium- and long-term inflation expectations and price
formation becoming contaminated, as well as the additional challenges posed by the ongoing tightening
of global monetary and financial conditions. Based on these considerations, on this occasion, the Board
decided to increase the target for the overnight interbank interest rate by 50 basis points to 6%. With this
action, the monetary policy stance adjusts to the trajectory required for inflation to converge to its 3%
target within the forecast horizon.

For the next monetary policy decisions, the Board will monitor thoroughly inflationary pressures as well
as all factors that have an incidence on the foreseen path for inflation and its expectations. The latter, in
order to set a policy rate that is consistent at all times with both an orderly and sustained convergence
of headline inflation to the 3% target within the time frame in which monetary policy operates and an
adequate adjustment of the economy and financial markets.

Source: Banco de México

From The Traders Community News Desk