Mexico: Banxico hikes again in May; adopts more hawkish forward guidance
May 12, 2022
On 12 May, 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 7.00%, marking the eighth consecutive hike and the third this year. As a result, rates are now back to their pre-pandemic levels.
The Bank’s decision was part of an ongoing attempt to keep price pressures under control and stop inflation expectations from becoming de-anchored. Both headline and core inflation have trended above the Bank’s 2.0–4.0% target range for some months now, with headline inflation rising to a fresh multi-decade high in April. Moreover, external price pressures are likely to stay elevated in the near term due to the war in Ukraine driving global commodity prices up and lockdowns in China hampering global supply chains. In light of recent developments, Banxico markedly revised up its own inflation forecasts for this year, and commented that long-term market inflation expectations remained above the target.
The Bank became more hawkish this month, stating that “given the growing complexity in the environment for inflation and its expectations, taking more forceful measures to attain the inflation target may be considered”. This suggests that the policy rate could increase by greater than 50 basis point increments going forward. Our panelists currently see multiple rate hikes before the end of the year.
Cristobal Arias Ortega, head of Arimato Metrics, said:
“We expect Banxico to continue hiking its policy rate throughout the forthcoming monetary policy committee meetings in 2022, to at least 8.00% by yearend. This level would keep the short-term ex-ante real interest rate, which the Bank defines as the difference between its current policy rate and a benchmark of analyst inflation expectations over the next 12 months, within the Bank’s estimated neutral territory of 1.80% and 3.40%. However, a faster timeline from the Fed to reduce its balance sheet and increase its funds rate will pressure Banxico to move its policy rate in tandem with the Fed.”
The next monetary policy decision will be announced on 23 June.
Author: Oliver Reynolds, Economist