Mexico’s central bank boosted its key interest rate to an all-time high after inflation hit the fastest pace in over 21 years, but dispensed with the hawkish forward guidance that it had given in its previous decision.
Banxico, as the bank is known, on Thursday delivered a second straight increase of 75 basis points to the benchmark rate, taking it to 8.5%, as expected by all 24 economists in a Bloomberg survey. Never since the bank began targeting inflation in 2008 has monetary policy been so restrictive, with the previous record being 8.25%.
Yet the bank didn’t repeat the forward guidance telegraphing Thursday’s hike that it had given in its June decision, a move some analysts read as preparing investors for smaller rate increases. In a statement accompanying Thursday’s decision, the board said it “will assess the magnitude of the upward adjustments in the reference rate for its next policy decisions based on the prevailing conditions.”
By removing the forward guidance, Banxico’s statement “opened the door to reduce the pace” of rate increases, said Carlos Capistran, chief Mexico & Canada economist at Bank of America Corp. “We expect Banxico to hike 50bps at its next meeting with risk of another 75bps.”
The rate increase matched the US Federal Reserve’s hike last month, as Mexican policymakers tend to follow their US counterparts to avert abrupt capital outflows. Banxico started with small, 25 basis-point increases and has been going at triple that pace since June, boosting borrowing costs by 4.5 percentage points over the past 14 months and more than doubling the key rate in the period.
“By adopting a more gradual tone, they are implying that the next monetary policy decision will likely be influenced by what happens with the Fed,” said Pamela Diaz Loubet, Mexico economist at BNP Paribas SA.
The bank sees now core inflation, which strips out some energy and food prices and is seen as a better predictor of future price readings, peaking at 7.9% in the third quarter of 2022, up from a previous estimate of 7.4%.
Source: El Financiero