Mexico hikes interest rates again in bid to tame inflation

Mexico’s central bank hiked interest rates for the second consecutive meeting as rising consumer prices threaten inflation expectations and the economic recovery.

Inflation has recently accelerated in emerging markets from India to Russia as companies pass on higher commodity prices to consumers and as demand picks up before supply chains are fully recovered from the coronavirus pandemic [File: Cesar Rodriguez/Bloomberg]

Mexico’s central bank raised borrowing costs for the second consecutive meeting Thursday, as stubbornly elevated and above-target consumer price increases have begun to contaminate inflation expectations.

Banco de Mexico boosted its key interest rate by a quarter-point to 4.5% after a surprise hike in June that did little to tame inflation, currently running at almost double the bank’s target. All 22 economists surveyed by Bloomberg predicted the increase.

“They’ve given a strong signal that with inflation running well above target they want a tighter policy,” said Nikhil Sanghani, a Latin America economist at Capital Economics, before the central bank’s decision was released.

Mexico’s economy is quickly rebounding so far in 2021 after shrinking 8.2% last year, the most in almost a century. The recovery, with GDP seen growing 6.2% by economists surveyed by Citibanamex, is adding to inflationary pressures and helped lead the central bank to start tightening its monetary policy earlier than expected by most analysts.

Annual inflation had remained around 6% since April, putting the bank known as Banxico under pressure after it initially said that the price spike would be momentary. Prices have been driven up by supply shocks, food and energy inflation and recovering domestic demand.

Banxico targets inflation at 3%, plus or minus 1 percentage point. Prices grew by 5.8% in July, slowing only slightly from 6.1% in April.

What Bloomberg Economics Says

“Headline inflation has lowered on waning base effects, but it remains high and, along with accelerating core prices, raises concerns. Results keep showing pressure from commodity prices, supply disruptions and changes in consumption habits.”

— Felipe Hernandez, Latin America economist

Inflation has recently accelerated in emerging markets from India to Russia, as companies pass on higher commodity prices to consumers, and demand picks up before supply chains are fully recovered from the pandemic. Brazil and Chile are also tightening their monetary policy and Peruvian policy makers meeting later Thursday will consider their first rate increase in five years. Colombia’s central bank indicated that it may soon join the regional tightening trend.

Against that backdrop, Economy Minister Tatiana Clouthier said Wednesday that the third wave of the pandemic could affect growth. Yet Capital Economics’s Sanghani said that threat would have to damage expectations in a significant way for the central bank to change course.

“It’s still a bit too early to say that this latest virus wave has derailed Mexico’s economic recovery. It’s more a bump in the road at this stage,” Sanghani said.

Banxico has still has three more rate decisions scheduled before Governor Alejandro Diaz de Leon ends his term at the end of the year. President Andres Manuel Lopez Obrador has nominated his former Finance Minister Arturo Herrera to replace him, a change that may lead to changes in the bank’s approach to combat inflation.

–With assistance from Rafael Gayol.

Source: Bloomberg