Wednesday, June 12, 2024

Central bank hikes interest rate to 8% over inflation concerns

The Bank of México (Banxico) raised its benchmark interest rate by 25 basis points today to a nearly 10-year-high of 8%, citing concerns over inflation that the incoming government’s economic polices risk fanning.

The rate hike, expected by economists, is the third this year.

Another 25-basis-point increase would take the interest rate to its highest level since Banxico adopted a new benchmark rate policy in January 2008.

Analysts consulted by the news agency Bloomberg said there is a 100% probability that the central bank will increase rates again next month.

In a statement, Banxico said it raised rates today because the outlook for inflation had “deteriorated significantly,” explaining that there are “significant risks related to the possible adoption of policies that could structurally affect the economy’s price formation process.”

The Mexican peso and the stock exchange have taken a hit recently as concerns grow over the economic direction the incoming López Obrador government will take once in office.

The president-elect has already confirmed that the US $14-billion Mexico City International Airport will be cancelled, triggering worry over the economic impact and a slide in the peso, while bank stocks plummeted last week after senators from the soon-to-be ruling Morena party unexpectedly presented a proposal to curb bank charges.

The peso was hurt by the airport cancellation decision, Banxico said, and “in general by markets’ concerns regarding both the incoming administration’s policies and some legislative initiatives.”

The currency strengthened slightly on the back of the Banxico rates announcement but is still trading above 20 to the US dollar. A persistently high dollar could place further pressure on inflation.

Banxico targets inflation of 3% with 1% tolerance in both directions but the annual rate in October was 4.9%.

The bank said that it would take any necessary action, including holding or hiking rates, to get inflation on track to achieve the 3% goal.

Many banks are forecasting both a weaker peso and weaker growth this year and next due to uncertainty about López Obrador’s policy direction.

The Fitch credit rating agency revised its outlook for Mexico to negative two days after the airport cancellation announcement.

Charles Seville, Fitch’s primary analyst for Mexico, said the decision to scrap the airport, which followed a public consultation on the future of the project, “came as a shock to the markets.”

He also said early this month that “there is the suggestion that other projects could be put to a popular vote, which would introduce more uncertainty.”

That suggestion became reality this week when the president-elect announced that another public vote would be held on November 24 and 25 on his proposal to build the so-called Maya train and two other infrastructure projects as well as 10 social programs.

López Obrador, a leftist political veteran, takes office on December 1.

Source: El Financiero (sp), Reuters (en) 

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