In contrast to the US Federal Reserve and the Bank of England, emerging markets have aggressively increased borrowing costs this year as a way to tame deteriorating inflation expectations.
Mexico’s central bank raised interest rates by a quarter of a point for its fourth consecutive meeting and maintained a steady pace of adjustment, although inflation accelerated faster than expected.
Political decision-makers, led by central bank governor Alejandro Diaz de Leon, cast a split 4-1 vote to raise the key interest rate to 5% on Thursday, as predicted by 18 out of 26 economists surveyed by Bloomberg. Eight analysts had expected the board of five people to go after a major increase of half a point.
“The risk balance of the inflation path within the forecast horizon deteriorated and remains upward,” board members wrote in a statement accompanying the resolution, adding that headlines and core inflation forecasts were revised upwards.
Diaz de Leon voted with board members Galia Borja, Irene Espinosa and Jonathan Heath for the rate hike, while Gerardo Esquivel was the dissenting vote to leave the course unchanged as in the last three resolutions.
The peso offset the gains after the price decision and traded flat at $ 20.6309 per dollar at. 13:57 in Mexico City.
The Banco de Mexico, known as Banxico, has steadily increased borrowing costs since June, the first austerity cycle since late 2015 to 2018, in an attempt to curb inflation, which has remained around 6% since April, surprising politicians. Central banks in Brazil, Chile, Peru and Colombia, on the other hand, have accelerated the pace of austerity in recent weeks in response to rising consumer prices.
Latin America’s second-largest economy declined during the third quarter, which helped deter Banxico from a more aggressive interest rate movement. The step-by-step rate hikes have continued, despite annual price increases exceeding 6.2% in October and staying well above the bank’s inflation target of 3%, plus or minus one percentage point.
“The bank continues to focus on a cautious rise in the key policy rate, based on the weakness of the economy,” said Andres Abadia, chief economist in Latin America at Pantheon Macroeconomics. “Obviously, inflationary pressures are upward, and that could hurt expectations and the economic recovery quite a bit.”
Unlike the Federal Reserve and the Bank of England, emerging markets have aggressively increased borrowing costs this year as a way to tame deteriorating inflation expectations. In Latin America, central banks have reacted as consumer prices are pressured by global supply chain disruptions and more expensive energy and food supplies.
“The shocks that have boosted inflation are largely considered to be temporary,” Banxico said in a statement. “Nevertheless, the horizon in which they can affect it is unknown, and they have involved a wide range of products while being of considerable size. This poses a greater risk to the price formation process and to inflation expectations.”
Energy prices were among the upside risks as global prices rose.
Mexico’s central bank has another meeting, in December, before Diaz de Leon leaves his post to be replaced by former finance minister Arturo Herrera. Economists in a recent Citigroup Inc. survey indicated that the year-end closing rate of the key interest rate would reach 5.25% as inflation continues its upward trajectory.
Gabriela Siller, director of economic analysis at Grupo Financiero BASE, reiterated the prediction of another quarter-point increase this year because “there is still significant inflationary pressure and, above all, because expectations continue to rise.”
Banxico also said in its statement that it expected inflation to reach 6.8% by the end of this year and 3.3% by the end of 2022, approaching the inflation target by first reaching 3.1% in the third quarter of 2023.
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