The Bank of Mexico’s key interest rate remains at 11.25% after the governing board unanimously decided to maintain the record high rate at a monetary policy meeting on Thursday.
It was the fourth consecutive meeting at which the central bank’s board members decided to leave rates unchanged due to ongoing inflationary pressures.
Banxico, as the bank is known, noted in a statement that annual headline and core inflation rates have continued to decrease since its last monetary policy meeting in early August.
“However, they are still high, as they registered 4.44% and 5.78%, respectively, in the first fortnight of September,” the bank said.
It also noted that “economic activity shows resilience and the labor market remains strong.”
Those factors could contribute to inflationary pressures as could elevated public spending on infrastructure projects in 2024.
Banxico described the inflation outlook as “very complex,” noting that there are a range of upside risks to its projection that inflation will converge to its 3% target in the second quarter of 2025.
They include “foreign exchange depreciation due to volatility in international financial markets” and “pressures on energy prices or on agricultural and livestock product prices.”
The central bank anticipates that inflation will be higher than it previously forecast at the end of this year and in 2024. It sees headline inflation at 4.7% in the final quarter of 2023, up from a 4.6% projection in early August, and anticipates rates of 4.4% and 4% in the first and second quarters of 2024.
Banxico’s previous forecast had headline inflation at 3.7% in Q2 of 2024 and 3.1% in the final quarter of next year. It now anticipates a 3.4% rate at the end of 2024.
“In order to achieve an orderly and sustained convergence of headline inflation to the 3% target, [the board] considers that it will be necessary to maintain the reference rate at its current level for an extended period,” the bank said, repeating a message it conveyed in previous statements after board members decided to maintain the 11.25% rate.
The latest decision to keep rates on hold was widely expected, with all 23 economists surveyed by Bloomberg predicting it.
Some analysts have predicted an initial cut to the 11.25% rate at Banxico’s final monetary policy meeting of 2023 on Dec. 14. But Marco Oviedo, a senior strategist at XP Investimentos, said that the new inflation forecasts will mean that “the central bank will be very patient.”
“I do not discard any changes in the rate until elections take place — after June,” he said, referring to the presidential and congressional elections that will take place in Mexico on June 2, 2024.
The Bank of Mexico raised its benchmark rate by 725 basis points during a hiking cycle that began in June 2021 and didn’t end until its decision in May to maintain the 11.25% level.
Its decision to hold the rate at a record high through four monetary policy meetings differs from those of some other central banks in Latin America that have begun cutting rates as inflation eases. The central banks of Brazil, Chile and Peru are among those that have lowered borrowing costs.
Bloomberg reported that the Mexican peso strengthened to a session high of 17.57 to the US dollar on Thursday “after the central bank’s comments reinforced the view that it won’t begin its easing cycle until next year.”
Shortly after 9 a.m. Mexico City time on Friday, the peso had strengthened to 17.38 to the greenback. The significant difference between Banxico’s benchmark interest rate and that of the United States Federal Reserve (currently 5.25-5.5%) is cited as one factor that has contributed to the peso’s appreciation of over 10% against the US dollar this year.
With reports from Bloomberg
