Tuesday, November 28, 2023

Central bank ups interest rate to 7%; analysts expect it go higher still

Citing high inflation and the tightening of global monetary and financial conditions, among other factors, the Bank of México (Banxico) has raised its benchmark interest rate by 50 basis points to 7%.

Four of five members of the central bank’s governing board voted for a 0.5% hike at a meeting on Thursday. The fifth member voted in favor of a 0.75% increase.

The bank has now raised rates at seven consecutive board meetings, with 0.5% hikes at the last four.

In making the decision to up the overnight interbank rate, the governing board “evaluated the magnitude and diversity of the shocks that have affected inflation and its determinants,” Banxico said in a statement.

It noted that headline and core inflation reached 7.68% and 7.22%, respectively, in annual terms in April, “their highest levels since January 2001.”

Worldwide inflation has continued increasing due to pressures caused by bottlenecks in production, by the recovery of demand, and high levels of food and energy prices, which have risen in part due to war in Ukraine.

At Thursday’s meeting, the board members also assessed the risk of inflation persisting over the medium and long term, Banxico said.

In addition, they considered “the increasing challenges posed by the ongoing tightening of global monetary and financial conditions, the environment of significant uncertainty, and greater inflationary pressures associated with the geopolitical conflict and with the resurgence of COVID-19 cases in China, as well as the possibility of inflation being affected by additional pressures.”

The bank sees core inflation declining to 5.9% in the fourth quarter of this year, 3.1% in the last quarter of 2023 and 3% — its ultimate target — in the first quarter of 2024.

Irene Espinosa was the only member of the governing board who voted for a 0.75% rate increase.
Irene Espinosa was the only member of the governing board who voted for a 0.75% rate increase.

“Given the growing complexity in the environment for inflation and its expectations, taking more forceful measures to attain the inflation target may be considered,” it said.

Three economists cited by the newspaper El Economista believe that there will be additional interest rate hikes at the four remaining board meetings this year and that a steep 0.75% hike at a single meeting is possible.

Jessica Roldán of brokerage house Finamex and Janneth Quiroz of the Monex financial group both predict a benchmark rate of 8.5% at the end of the year, although they didn’t rule out the possibility of it exceeding 9%.

Pamela Díaz Loubet of the French bank BNP Paribas anticipates a 2.5% jump to 9.5% by the end of 2022.

“Without a doubt the door was left open to more aggressive three-quarter point increases in the future,” Roldán said.

Quiroz said the tone of the Banxico statement was hawkish, indicating that the board members have little tolerance for high inflation and are prepared to keep increasing interest rates to keep it in check. Díaz agreed that the content of the statement pointed to a further tightening of monetary policy this year.

With reports from Milenio and El Economista 

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