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Mexico Monetary Policy December 2018

Mexico: Banxico hikes rates as AMLO roils markets

At its 20 December monetary policy meeting, Banxico’s five-member board voted unanimously to hike the target rate by 25 basis points to a decade-long high of 8.25%. Most analysts had expected as much; on top of recent market-shaking events, policymakers had been split in November over whether to hike rates by more than they did—with one member having proposed a steeper 50-basis-point hike.

The board’s decision came as a response to mounting financial volatility amid policy uncertainty surrounding the new administration of Andrés Manuel López Obrador (AMLO), which is set to exacerbate inflationary pressures. As such, the hike was intended to both tame inflation and bolster financial markets. Despite this, however, the peso is expected to remain weak at the outset of the year after last October’s cancellation of the New Mexico City International Airport (NAIM) first sent it plummeting. In frontloading a second fourth-quarter hike, policymakers were also reacting to tepid economic-activity metrics, which suggest a slowdown over the coming months and which appear set to jeopardize any early-year recovery.

In raising its short-term inflation forecasts, the board continued to expect price pressures to remain above-target through 2020. Looking ahead, with above-target inflation and policy uncertainty both expected to persist over the coming quarters, the board took a hawkish stance and did not rule out additional hikes in the new year. That said, most analysts expect the fourth-quarter hikes to be sufficient as calmer heads prevail; they do not expect any more hikes in 2019. Moreover, policymakers emphasized that the new administration’s ability to stick to its fiscal targets will be of the utmost importance to reassure financial markets.

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