The Mexican Central Bank, Banco de México raised interest rates by 75 basis points to 7.75% with the bank saying headline and core inflation forecasts were revised upwards. The bank said it would hike rates again and by as much necessary to tame inflation that has surged to double its target of 3%.
Banco de México’s Governing Board decided to raise the target for the overnight interbank interest rate by 75 basis points to 7.75%, effective June 24, 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. Last meeting the only member voting in favor of raising the target for the overnight interbank interest rate by 75 basis points was Irene Espinosa
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 13.25% and penciled in another hike for August.
Highlights
- In the first half of June, headline and core inflation registered annual variations of 7.88% and 7.47%, respectively, remaining at elevated levels unseen in two decades.
- Their expectations for 2022 and 2023 increased significantly once again. Medium- and long-term expectations for headline inflation were revised slightly upwards and those for core inflation remained stable, although at levels above the target.
- In view of greater-than-anticipated pressures on inflation, the forecast for headline inflation was revised upwards up to the third quarter of 2023, while that for core inflation was also adjusted to the upside for the entire horizon, although convergence to the 3% target in the first quarter of 2024 is maintained.
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 decline in the intensity of the geopolitical conflict.
- ii) a better functioning of supply chains;
- iii) a greater-than-expected effect from the negative output gap; and
- iv) a larger-than-anticipated effect from the Policy Program to Fight Inflation and High Prices.
The balance of risks for the trajectory of inflation within the forecast horizon is 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 risk of contamination of medium- and long-term inflation expectations and of 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 associated with the geopolitical conflict and with the resurgence of COVID-19 cases in China, 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, on this occasion, by 75 basis points to 7.75%. 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 monitor thoroughly 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 the trajectory needed to facilitate the orderly and sustained convergence of headline
inflation to the 3% target within the time frame in which monetary policy operates as well as an adequate
adjustment of the economy and financial markets. 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.
Source: Banco De Mexico
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