Banxico Shows Hawkish Side With Larger-Than-Forecast Rate Hike
(Bloomberg) -- Mexico’s central bank unexpectedly accelerated the pace of interest rate increases, a hawkish move that seeks to contain quickly-deteriorating inflation expectations.
Policy makers led by outgoing central bank Governor Alejandro Diaz de Leon raised the benchmark rate by a half-point to 5.5% on Thursday, their most aggressive hike since February 2017. They surprised all but eight of 25 economists surveyed by Bloomberg, with the remaining 17 forecasting a fifth straight quarter-point hike.
The bank’s decision -- backed by four of its five board members -- sent the Mexican peso rallying as much as 1.2%, its biggest intraday jump since Dec. 2.
Policy makers said in a statement their move was driven by “the magnitude and diversity” of inflation shocks, “along with the risk of price formation becoming contaminated, and the challenges posed by the ongoing tightening of monetary and financial global conditions.”
Inflation in Mexico has accelerated steadily this year, remaining above target amid a cautious tightening of monetary conditions designed to maintain some support for the economy. But policy makers have been clear that their accommodative policy has limits, and that sustained price pressures or any deterioration of inflation expectations would be met with a decisive response.
“Though inflation is primarily imported, this 50 basis-point increase was needed to contain inflation expectations,” said Gabriela Siller, director of economic analysis at Banco BASE. “Inflation won’t be reduced immediately, but it’s a good sign.”
Across Latin America, major inflation-targeting central banks are quickly tightening monetary conditions to rein in rising consumer prices. Among developed economies, the Bank of England surprised investors earlier on Thursday with a 15 basis-point increase to its benchmark rate, while the U.S. Federal Reserve said three rate hikes are on tap for next year.
What Bloomberg Economics Says
“Mounting concerns about the inflation outlook and additional worries about tighter global financial conditions finally drove Mexico’s central bank to accelerate interest-rate hikes. The central bank is likely to continue increasing rates next year in clips of 50 basis points. The bar for bigger adjustments will be high.”
-- Felipe Hernandez, Latin America economist
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Mexico’s annual inflation rate hit a two-decade high of 7.37% last month, slower than Brazil’s but faster than those seen in Chile, Peru and Colombia. Banxico, as the central bank is known, targets inflation at 3%, plus or minus one percentage point.
“The bank is reaffirming its promise to fight against inflation, in an environment that has become complicated for emerging markets,” said Andres Abadia, chief Latin America economist at Pantheon Macroeconomics.
Economists had hesitated to predict that Banxico would go for a half-point hike in part because Mexico’s economic recovery has sputtered, with gross domestic product contracting in the third quarter.
Minutes of Banxico’s November meeting showed that at least one board member thought the bank should deliver a bigger rate increase based on inflation forecasts, but was concerned about unsettling markets. In December’s decision, Gerardo Esquivel, who in past months had voted against any hike at all, favored a 25 basis-point increase while the remainder of the board voted for 50 basis points.
“Banxico’s hawkish turn increases the chance of another 50 basis-point hike in February, but uncertainty remains high,” said Carlos Capistran, chief economist for Mexico and Canada at Bank of America Corp.
A shake-up in Banxico’s leadership has added an element of uncertainty. President Andres Manuel Lopez Obrador surprised investors by withdrawing the nomination of Arturo Herrera to take over the helm of the central bank and nominating a little-known economist, Victoria Rodriguez Ceja, as the new governor.
The move raised objections from some of the president’s opponents, who have suggested that Rodriguez may be more likely to bend to the wishes of Mexico’s governing party.
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