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Mexico Monetary Policy June 2021

Mexico: Banxico hikes policy rate in June in surprise move

On 24 June, the Governing Board of the Bank of Mexico (Banxico) decided to hike the target for the overnight interbank interest rate from 4.00% to 4.25%, reversing the 25 basis-point rate cut delivered earlier in the year.

The decision was driven by the desire to keep price pressures in check, as inflation has been well above the Bank’s 3.0% target in recent months. Moreover, the Bank now only expects inflation to converge to the target in late 2022 and stated that risks to its inflation forecast are skewed to the upside, while highlighting that the market’s medium- and long-term inflation expectations are above 3.0%. In addition, recent data suggests the domestic economy is recovering from the pandemic, providing the Bank with space to tighten policy.

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. Given our Consensus is for above-target inflation in the coming quarters, further rate hikes are a possibility in the near term, and the room for lower rates certainly seems to have disappeared for the time being.

Alejandro Javier Saldaña Brito, chief economist at Ve Por Más, commented:

“If inflation does not decelerate clearly and/or financial conditions become less favourable (Fed tapering starting this year), it will be reasonable to expect another one or two rate hikes during the rest of the year, and another two 25 bp hikes in 2022.”

The next monetary policy meeting is scheduled for 12 August.

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