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Mexico Monetary Policy August 2021

Mexico: Banxico hikes policy rate again in August

On 12 August, the Governing Board of the Bank of Mexico (Banxico) decided to hike the target for the overnight interbank interest rate from 4.25% to 4.50%, marking the second successive rate hike. However, the decision was not unanimous, with two board members voting to keep rates constant.

The decision was driven by the desire to keep inflation in check, as both headline and core price pressures have been well above the Bank’s 3.0% target in recent months. Moreover, the market’s inflation expectations for 2021 continued to increase, and the Bank substantially revised up its own inflation forecasts for the coming quarters. As a result, Banxico felt that further tightening was necessary in order to ensure inflation converges to the target, and to avoid inflation expectations becoming de-anchored.

In its statement, Banxico struck a neutral tone and did not give explicit guidance on the future direction of the policy rate, instead reiterating its focus on returning inflation to target. Our Consensus is for further rate hikes by year-end as the Bank continues its efforts to rein in price pressures.

Analysts at D.Econsignal said:

“The minutes clearly reflect the high level of uncertainty around inflation, with a wide divergence of opinions among members, something that might continue in the next meetings. In this way, based on our view of inflation remaining in a complicated situation as global pressures might continue for a while, local risks could last longer. We expect two additional 25bps hikes in the reference rate this year, taking it to 5.00%.”

The next monetary policy decision will be announced on 30 September.

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