Bank of Mexico orders largest-ever rate hike

The board of directors of the Bank of Mexico ordered a 75 basis point hike on June 23, bringing the reference rate to 7.75%. The move is the largest single increase in the policy rate since the Bank of Mexico adopted an interest rate target in January 2008.

The June 23 decision is the ninth rate increase in the last 12 months. The Bank of Mexico has gradually sped the pace of its policy tightening: after four 25bp hikes between June and November 2021, the central bank board shifted to 50bp hikes, ordering four between December 2021 and May 2022. In total, the central bank has raised rates from 4% to 7.75%.

The decision comes just over a week after the US Federal Reserve ordered a 75bp increase in the federal funds rate. The Federal Open Market Committee’s decision was the largest jump in the fed funds rate since 1994.

In its press statement, the Bank of Mexico board – which voted unanimously for the hike – promised further tightening. “The board intends to continue raising the reference rate and will evaluate taking the same forceful measures if conditions so require,” it said.

The central bank, also known as Banxico, has continued raising rates under governor Victoria Rodríguez Ceja, who took office on January 1. A former finance ministry official under incumbent president Andrés Manuel López Obrador, some observers feared she would yield to his preferences as governor.

López Obrador has clashed with the central bank before on several occasions, often over transfer of Banxico resources to the government. In early May, he said that he opposed interest rate increases.

Today (June 24), the president criticised the latest rate hike. “I respect the autonomy of the Bank of Mexico, but now the technocrats should think of another formula,” López Obrador said, according to El Financiero.

Mexico is confronting inflation well above Banxico’s 3% target. The board said that inflation was nearly 7.9% year on year in the first half of June. Core inflation was 7.5%. According to the Mexican national statistical agency, consumer price index inflation has been on a mostly upward trend since the December 2020, when it was 3.2%. The index has stood above 7% since December 2021.

Carlos Morales, director of Latin America sovereigns for Fitch, told Central Banking that the Mexican central bank “continues to showcase a prudent monetary policy”. Morales said Fitch agrees that inflation will align with Banxico’s target “over the next two years”, but noted that projections had become more uncertain and risks leaned to the downside.

Carlos Serrano, chief economist at BBVA Mexico, said that despite the 75bp rate hike, Banxico is not shadowing the Fed. Mexico’s monetary policy is already tighter than the US’s, while demand is weaker, he said.

Serrano was more sceptical that the central bank would achieve its 3% target. “I do think that inflation will begin to decline beginning in Q4 2022 and will get below 4% (Banxico’s upper limit) by the end of 2023”. However, he noted that Mexican policy-makers have “never been able to consistently reach that 3% level since the adoption of the inflation-targeting regime” almost 15 years ago. “That’s why expectations have, for a long time, been anchored at around 3.5%”.

The board said that it expects that inflation will reach the central bank’s target in the first quarter of 2024, when it projects 3.1% headline inflation. However, it acknowledged “medium- and long-term expectations for headline inflation were revised slightly upwards”.

The board said that forecast inflation risks were “biased significantly to the upside”. It specifically mentioned “geopolitical conflict”, a depreciation of the peso and the Covid-19 pandemic as upside risks.

The Mexican peso has seen several brief episodes of depreciation against the US dollar over the past year. However, the peso has appreciated overall since last November by about 10%.

Banxico’s next monetary policy decision is scheduled for August 11.