Saturday, June 22, 2024

Central bank ups interest rate a quarter point to 4.25%

The Bank of México board voted to raise the interest rate by 0.25% Thursday, in a surprise decision.

Three of the board’s five members voted in favor of the hike, deemed necessary to control inflation.

Mexican consumer prices rose 6.02% in the year through the first half of June, well above Banxico’s target of 3% plus or minus one percentage point, data from national statistics agency Inegi has shown.

Banxico said in a statement it was “necessary to strengthen the monetary policy stance in order to avoid adverse effects on inflation expectations, attain an orderly adjustment of relative prices, and enable the convergence of inflation to the 3% target.”

The last time the interest rate was increased was in 2018, when it was raised to 8.25%. Since then the central bank has consistently cut interest rates beginning in 2019, as the economy contracted even before the Covid-19 pandemic. Board members voted to maintain a 4% rate at the last two meetings.

The decision went against the predictions of 23 economists surveyed by Bloomberg, who expected no rate change. Some observers had speculated that changes to the Banxico board since 2018 would make it less proactive, despite stubbornly high inflation.

Economist at Banco Base, Gabriela Siller, said the move was a sign of political transition. “The surprising increase in the rate indicates that the policy of economic emergency has ended,” she said, referring to conservative market policy brought on by the Covid-19 pandemic.

Goldman Sachs economist Alberto Ramos applauded the decision. “Signaling is for Wimps! No Signal, No Hesitation, No Fear of a Market Surprise,” he said.

Ratings agency S&P on Thursday raised its forecasts for Mexico’s economic growth to 5.8% for this year and 2.9% in 2022, saying Latin America’s second-largest economy was benefiting from a strong U.S. recovery, which has stimulated manufacturing exports and remittance payments.

President López Obrador recently forecast that by the third quarter the Mexican economy will reach pre-pandemic levels, after gross domestic product contracted by some 8.5% last year driven by pandemic-related fallout.

The peso was up as much as 2% on the day against the U.S. dollar after the rate hike. Banxico has said it expects to hit its inflation target during the third quarter of 2022.

With reports from El Economista, Infobae and Reuters 

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