Mexico: Banxico hikes interest rate by 25 basis points in June, signals potential end to hiking cycle
June 22, 2017
The Central Bank of Mexico (Banxico) announced its decision to raise interest rates by 25 basis points to 7.00% at its 22 June monetary policy meeting. Although the decision was largely expected by market analysts, the Bank’s communique was surprisingly dovish. In a rare turn of events, the decision was not unanimous, as one board member voted in favor of standing pat. Banxico has raised interest rates by 125 basis points this year and by a total of 400 basis points since the Fed began its tightening cycle in December 2015.
Banxico officials seemed much more confident in the inflation outlook than at previous meetings. The press release stressed that the Bank expects inflation to peak in a few months, argued that its tightening cycle has successfully anchored inflation expectations in the medium term and noted that the balance of risks to inflation are now neutral. This upgrade to their inflation assessment is noteworthy, as it conspicuously contrasted the concerns highlighted last month over the possibility of second-order effects due to mounting inflationary pressures and the risk of unfettered inflation expectations.
The Bank also provided a laudable degree of forward guidance, unusual for a Banxico communique. The Bank removed references to the “adjustments […] that will be judged convenient going forward”. It also noted that, with the most recent hike, “the level of the policy rate is consistent with the efficient convergence of inflation to 3.0%.” Benito Berber, Economist at Nomura, commented on the particular wording in this month’s statement:
“Banxico has used the word [efficient] to signal to the market that it also takes into account the costs to the economy from rate hikes. Therefore, we interpret this line as saying that a policy rate higher than 7.0% would impose unjustified costs to the economy in an effort from Banxico to take the inflation back to the 3.0% target.”
All told, the Central Bank struck a surprisingly dovish tone in June’s press release. Nonetheless, this does not necessarily mean the end of Banxico’s hiking cycle. Indeed, the Bank said that it would continue to monitor the performance of the Mexican peso, the potential second-order effects from transitory price shocks, the expected deceleration in economic growth and the Federal Reserve’s own hiking cycle, and that it would act to keep a prudent monetary stance. Nevertheless, the lack of unanimity in the decision, a notoriously less downbeat inflation assessment and the strong forward guidance provided all suggest that the end to the hiking cycle is in fact near.
Author: David Ampudia, Economist