The Bank of México raised its interest rate by 0.25%, marking the second consecutive 3-2 split-decision in favor a quarter-point increase by the central bank’s board of governors.
The hike to 4.5%, returning the rate to September 2020 levels, points to the bank’s concerns about inflation, which was 5.81% in July, far from the 3% target for the fifth consecutive month.
Banxico expects the year to close with inflation at 5.7%, up from a prior projection of 4.8%. However, prices did decrease in July: inflation was the lowest since March; in April the rate had peaked at 6.08%.
The institution hopes to hit the 3% inflation target in in the first quarter of 2023, later than its previous prediction of mid-2022, and expects economic growth to continue despite a third wave of Covid-19 infections.
It attributed inflation to the knock-on effect of the pandemic on supply chains and production. The price of LP gas was 35% higher in annual terms in July and pork was up 18%, according to the federal statistics agency Inegi.
Nikhil Sanghani, an economist at Capital Economics, called the decision “dovish,” a term usually reserved for the lowering of the rate.
He argued that the incremental hike was conservative, and forecast 25 basis point bumps at each of the bank’s next four monetary policy meetings, which would take the rate to 5.5% by the first quarter of 2022.
The previous increase on June 24 was the first since the beginning of 2019, when the economy contracted even before the Covid-19 pandemic. Despite gross domestic product plummeting by 8.5% in 2020, Banxico has raised growth expectations for this year, from 4.8% to 6%.
Banxico Governor Alejandro Díaz de León and board members Irene Espinosa and Jonathan Heath voted in favor of the rate increase, while members Galia Borja and Gerardo Esquivel were in favor of keeping the rate unchanged at 4.25%.