Banco de México Raises Rates Again with Inflation Risk to Mexican Economy

The Mexican Central Bank, Banco de México raised interest rates by 50 basis points to 7.00% with the bank saying headline and core inflation forecasts were revised upwards. One dissenter voted to hike by 75 bps.

mexico central bank

The Mexico central bank Governing Board increased the target for the overnight interbank interest rate by 50 basis points to 7.00%.

The vote was not unanimous. Voting in favor of the decision were Victoria Rodríguez, Galia Borja, Gerardo Esquivel, and Jonathan Heath. Voting in favor of raising the target for the overnight interbank interest rate by 75 basis points to 7.25% was Irene Espinosa

Highlights

  • World inflation continued increasing due to pressures originated by bottlenecks in production, by the recovery of demand, and the high levels of food and energy prices. This environment continues generating expectations of a faster withdrawal of monetary stimulus worldwide.
  • Financial conditions tightened further, with an increase in interest rates and a stronger US dollar, in a context of higher risk aversion.
  • Among key global risks are those associated with the pandemic, inflationary pressures lasting longer, the intensification of geopolitical turmoil, and greater adjustments in monetary and financial conditions.
  • In domestic financial markets, the peso remained relatively stable, while interest rates increased accordingly to global trends.
  • Preliminary information suggests that economic activity rebounded during the first quarter of 2022.
  • April headline and core inflation registered annual variations of 7.68% and 7.22%, respectively, their highest levels since January 2001, while their expectations for 2022 and 2023 increased significantly. Medium-term expectations for both of them were revised upwards, while those for longer terms have remained stable at levels above the target

These forecasts are subject to risks.

On the upside:

On the upside:

  • persistence of core inflation at high levels;
  • External inflationary pressures associated with the pandemic;
  • Greater pressures on agricultural and livestock product prices and in energy prices due to the ongoing geopolitical conflict;
  • iv) exchange rate depreciation; and v) cost-related pressures.

On the downside:

  • decline in the intensity of the war conflict.
  • a better functioning of supply chains;
  • a greater-than-expected effect from the negative output gap;
  • 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 remains biased to the upside and continues deteriorating.

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. It also considered the increasing challenges posed by the ongoing
tightening of global monetary and financial conditions, the environment of significant uncertainty, and
greater inflationary pressures associated with the geopolitical conflict and with the resurgence of COVID19 cases in China, as well as the possibility of inflation being affected by additional pressures.

Based on these considerations, the Board decided by majority to raise the target for the overnight interbank interest rate by 50 basis points to 7.0%. 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 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. Given the
growing complexity in the environment for inflation and its expectations, taking more forceful measures
to attain the inflation target may be considered.

Source: Banco De Mexico

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