Mexican central bank accelerates rates to try to tame inflation

The national flag flutters atop the Bank of Mexico building in downtown Mexico City. PHOTO: REUTERS/Edgard Garrido

(Reuters) – Mexico’s central bank on Thursday stepped up efforts to rein in surging inflation, raising its benchmark interest rate by 50 basis points to 5.50%, outpacing market expectations, and pushing up the peso currency against the dollar.

The decision to increase rates for a fifth consecutive meeting as inflation runs at its highest level in two decades split the Bank of Mexico’s board. Four of its five members opted for a 50-point hike and one for a 25-point increase.

The consensus forecast of a Reuters poll was for the bank to raise the rate by 25 basis points this month.

“Headline and core inflation expectations for 2021, 2022, and for the next 12 months increased again, as well as medium-term expectations, while those for longer terms have remained stable at levels above the target,” the bank said.

Mexican inflation accelerated faster than expected in November to 7.37%, the highest level since early 2001.

The bank, known as Banxico, targets inflation of 3%, with a 1-percentage-point tolerance range above and below that.

Banxico noted that the U.S. Federal Reserve this week announced https://www.reuters.com/markets/us/fed-prepares-stiffen-inflation-response-post-transitory-world-2021-12-15 an acceleration in the withdrawal of monetary stimulus, and set the scene for future rate increases. It also noted that other emerging markets had stepped up monetary policy tightening.

Nikhil Sanghani, an economist at Capital Economics, said in a client note that Banxico was “starting to act tough on inflation.”

Sanghani argued that the bank was not wedded to aggressive tightening, pointing to the fact that Banxico stated that it had “on this occasion” decided on a 50-point-hike.

“Even so, the majority of board members look set to press ahead with larger hikes given the Fed’s hawkish turn and the worrying inflation outlook,” Sanghani said.

In view of that, Sanghani said he was penciling in a further 200 basis points of hikes next year, taking the rate to 7.50%, well above a previous forecast of 6.00%.

Thursday’s decision was the last one presided over by Banxico Governor Alejandro Diaz de Leon, who will be replaced by newcomer Victoria Rodriguez beginning at the start of next year. 

Source: Reuters



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