As prices surge, Mexico boosts rate for fourth consecutive time

179

Mexico’s central bank raised interest rates by a quarter point for its fourth consecutive meeting, sticking to a steady adjustment pace even as inflation accelerated faster than expected.

Policy makers, led by central bank Governor Alejandro Diaz de Leon, cast a split 4-1 vote to raise the key rate to 5% on Thursday, as forecast by 18 of 26 economists surveyed by Bloomberg. Eight analysts had expected that the five-person board would go for a bigger half-point increase.

“The balance of risks for the trajectory of inflation within the forecast horizon deteriorated and remains biased to the upside,” board members wrote in a statement accompanying the decision, adding that headline and core inflation forecasts were revised upwards.

Diaz de Leon, together with board members Galia Borja, Irene Espinosa and Jonathan Heath, voted in favor of the rate hike, while Gerardo Esquivel was the dissenting voice in favor of leaving the rate unchanged as in the last three decisions.

The peso pared gains after the rate decision and was trading flat at 20.6309 per dollar at 1:57 p.m. in Mexico City.

Steady Increases

Banco de Mexico, known as Banxico, has been steadily increasing borrowing costs since June, the first tightening cycle since late 2015 to 2018, in an effort to slow inflation that’s remained around 6% since April, surprising policy makers. Central banks in Brazil, Chile, Peru and Colombia, by contrast, in the last weeks have accelerated the pace of tightening in response to surging consumer prices.

Latin America’s second-largest economy contracted during the third-quarter, helping dissuade Banxico from a more aggressive rate move. Incremental rate hikes have continued, despite annual price gains surpassing 6.2% in October and staying way above the bank’s goal, which targets inflation at 3%, plus or minus one percentage point.

“Policy makers acknowledged Mexico’s inflation outlook has worsened and risks have increased, but refrained from an outsize rate hike at Thursday’s meeting. The decision is likely to raise concerns the central bank is falling behind the curve, but was consistent with expectations for inflation to sharply fall next year and important differences with regional peers that have tightened more aggressively.”

— Felipe Hernandez, Latin America economist

Source: El Financiero

Mexico Daily Post