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Mexico Monetary Policy December 2021

Mexico: Banxico delivers fifth consecutive rate hike in December

On 16 December, the Governing Board of the Bank of Mexico (Banxico) opted to raise the target for the overnight interbank interest rate by 50 basis points to 5.50%. The move marked the fifth consecutive hike, and meant rates have now risen 125 basis points since the start of the year.

The Bank’s decision was part of an ongoing attempt to keep inflation under control and stop inflation expectations becoming de-anchored. Both headline and core inflation were at roughly two-decade highs in November amid ongoing global supply bottlenecks and elevated commodity prices, while both the market’s and Banxico’s inflation expectations for the coming year were revised up. Moreover, the Federal Reserve’s more hawkish monetary stance risks putting additional downward pressure on the peso—which has already wilted somewhat in recent months—and could thus further fan inflation. The latest rate hike from Banxico should offset some of this pressure.

In its communiqué, Banxico did not provide explicit guidance on future rate movements, but reiterated that it would “monitor thoroughly the behavior of inflationary pressures” going forward. Our panelists judge that further monetary tightening is highly likely ahead in order to dampen inflation.

Cristobal Arias Ortega, head of Arimato Metrics, commented:

“Going forward, we expect persistent supply chain disruptions, the tightening of global financial conditions (amid Fed rate increases) and broad exchange rate factors to remain a source of pressure to headline and core inflation. Thus, our view that Banxico’s policy rate will reach 6.50% by the end of 2022 still holds, and we are now allocating a higher likelihood of another 50bps hike in the first quarter of 2022.”

The next monetary policy decision will be announced on 10 February.

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