Mexico Monetary Policy March 2017

Mexico

Mexico: Banxico hikes interest rate by 25 basis points in March on the heels of the Fed

March 30, 2017

At its 30 March monetary policy meeting, Mexico’s Central Bank (Banxico) announced its decision to raise interest rates by 25 basis points to 6.50%. The decision to increase rates was unanimous and expected by the markets, since it followed the Federal Reserve’s (Fed) most recent hike on 15 March. Banxico has now raised interest rates by 75 basis points this year and by a total of 350 basis points since the Fed began its tightening cycle in December 2015.

The recent rate hike at the March meeting signals a shift in gear towards a slower pace of tightening. Benito Berber, Senior Latin America Economist at Nomura, points out that there is one line in the Bank’s statement which gives a key indication as to its future moves on monetary policy, which reads: “In this context, and with the aim of limiting second order contagion of relative prices and to contain inflation expectations and taking into account that the Fed increased its own rate 25bps, the board decided unanimously to increase its rate by 25bps." According to Berber:

“We interpret this statement as a message saying that if it wasn’t for the 25bp increase by the Fed, Banxico wouldn’t have increased its own rate. If we are correct, then Banxico could be signaling that it would follow the Fed tick by tick. The consequences of this are that Banxico would actually have to leave the policy rate unchanged for the next three meetings (May, June and August) if the Fed were to wait until September (as US Nomura economics forecasts) for the next hike. In our opinion, Banxico could be taking a pause from hikes in line with pauses from the Fed.”

It remains to be seen whether Banxico will keep at pace with the Fed. However, the aggressive frontloading of hikes over the past year provides the Central Bank with room for maneuvering in order to decouple from the Fed. Also the 25 basis-point increase—instead of 50 basis points as at the previous meeting—reflects the monetary authority’s more complacent view about the inflation outlook and current exchange rate dynamics.

In terms of consumer price developments, Banxico signaled that inflation continued to climb in March, but specified that it is due to transitory shocks from a weaker peso and higher energy prices. In addition, the monetary authority did not consider the balance of risks to inflation to have further deteriorated and implicitly said that the current inflation spike has been in line with its expectations. Regarding the exchange rate, the Mexican peso seems to be one less source of concern for Banxico. Nonetheless, the board stressed that the peso’s recent appreciation should not be taken for granted and that efforts to bolster the country’s macroeconomic fundamentals are still warranted. That said, the current rally of the peso is certainly welcome news for monetary policy makers.

On average, the view of the panel of analysts surveyed by FocusEconomics is that the target of the overnight interest rate will end 2017 at 7.07%. For 2018, analysts expect the interest rate to drop, on average, to 6.99%.


Author:, Senior Economist

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Mexico Monetary Policy April 2017

Note: Banxico target rate (Tasa objetivo de fondeo bancario) in %.
Source: Mexico Central Bank (Banxico).


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