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Mexico Monetary Policy December 2022

Mexico: Banxico hikes by 50 basis points in December

On 15 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 10.50%, taking total hikes in 2022 to 500 basis points.

The Banks decision was part of an ongoing attempt to rein in elevated price pressures: both headline and core inflation are still running at around double the upper bound of the Central Banks 2.0–4.0% target range, and Banxico does not see headline or core inflation returning to the target range until 2024. Moreover, the hike allowed Banxico to maintain a constant interest rate spread with the U.S., where the Fed raised rates by 50 basis points on 14 December.

In its communiqué, the Bank stated that it would hike rates at its next meeting in February. However, it suggested that February could mark the end of the tightening cycle. The Consensus among our analysts is indeed for rates to peak in Q1 this year, and to then decline marginally by Q4.

Giving their forecasts, Itau Unibanco analysts said:

“Our terminal policy rate forecast stands at 11.25% amid still high inflation, which would imply a 50-bp and 25-bp rate hikes in February and March.  Our call is contingent on the Fed delivering rate hikes of the same magnitude.”

In contrast, the EIU was slightly more dovish:

“We believe that Banxico will bring its tightening cycle to a close with another 50-basis-point rate increase in the first quarter of 2023, in sync with the Fed. This will take Banxico’s terminal policy rate to 11%. We expect the board to leave its benchmark rate on hold at this level for the remainder of next year.”

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