The Mexican Central Bank, Banco de México raised interest rates by 50 basis points to 11.00% at its February 2022 meeting, higher than expected. It was the 14th consecutive rate hike, adding to the 700bps of rate increases since the start of the bank’s tightening cycle in June. The Bank was expected to rise by 25bps, however January inflation accelerated for the second straight month to 7.91% in January up from 7.82% in the prior month and higher than expectations. Five of the six board members voted in favor of the decision, while a lone member preferred a softer 25bps increase.
The vote was not unanimous. Voting in favor of the decision were Victoria Rodríguez, Galia Borja, Irene Espinosa, and Jonathan Heath. Gerardo Esquivel voted in favor of raising the target for the overnight interbank interest rate by 25 basis points to 10.75%.
“Given the dynamics of core inflation, on this occasion it is necessary to continue with the magnitude of the reference rate adjustment of the previous policy meeting, in order to be in a better position to tackle a still-complex inflation environment”
Highlights
- Global inflation remains high, although headline inflation decreased in a large number of economies due to lower pressures on energy prices. In several cases, the core component still does not show a downward inflection. Most central banks, including the US Federal Reserve, continued raising their reference rates and announced that they will remain high for an extended period.
- Since the previous monetary policy decision, the Mexican peso has appreciated.
- Short-term interest rates increased while medium- and long-term ones decreased.
- In January, headline inflation increased to a level of 7.91%. Core inflation, which reflects inflation’s trend more accurately, surprised to the upside, reaching 8.45%. This was due to a slower-than-anticipated decrease in food merchandise inflation and a rebound in that of services.
- Inflation expectations for 2023 and 2024 were revised again upwards, while those for longer terms were adjusted slightly downwards, although they remain above target.
These forecasts are subject to risks.
On the upside:
On the upside:
- Persistence of core inflation at high levels.
- Pressures on energy prices or on agricultural and livestock product prices;
- Chinese economy’s reopening;
- Exchange rate depreciation
- Greater cost-related pressures.
On the downside:
- A greater-than-anticipated slowdown of the world economy.
- Adecline in the intensity of the geopolitical conflict;
- A better functioning of supply chains;
- A lower pass-through effect from some cost-related pressures;
- A larger-than-anticipated effect from the Federal Government’s measures to fight elevated prices.
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 inflationary shocks and its determinants, along with the evolution of medium- and long-term inflation expectations and the price formation process. It considered the challenges stemming from the ongoing tightening of global financial conditions, the environment of uncertainty, the persistence of accumulated inflationary pressures and the
possibility of greater effects on inflation, as well as the monetary policy stance already attained in this hiking cycle. In particular, it deemed that, given the dynamics of core inflation, on this occasion it is
necessary to continue with the magnitude of the reference rate adjustment of the previous policy meeting.
in order to be in a better position to tackle a still complex inflation environment. Based on the above, and with the presence of all its members, the Board decided unanimously to raise the target for the overnight
interbank interest rate by 50 basis points to 11.00%. 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. The latter, 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 considers that, given the monetary policy stance already attained and depending on the evolution of incoming data, for its next policy meeting, the upward adjustment to the reference rate could be of lower magnitude
Source: Banco De Mexico
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