- Latin American nation continues its record hiking cycle
- Mexico’s central bank raises borrowing costs to all-time high
According to Bloomberg article published on March 31, 2023, Mexico slowed the pace of interest rate increases Thursday, raising borrowing costs by a quarter percentage point, as decelerating inflation has policymakers on the cusp of ending a record tightening cycle.
Banxico, as the central bank is known, raised its key rate to 11.25%, matching the forecast of 27 of 28 economists surveyed by Bloomberg. The increase was in line with the board’s guidance given after its half-point February hike, which at the time surprised all analysts, who’d expected a quarter-point move up.
The combination of slowing inflation, now plainly in retreat after peaking near a two-decade high in September, and the recent liquidity crunch roiling US banks and markets puts Banxico very close to a terminal rate. Yet the central bank refrained from giving explicit guidance on its next steps, saying that it will depend on the inflation path.
“Since the last monetary policy meeting, annual headline inflation has decreased more than expected,” the board said in the statement accompanying the decision. “For its upcoming decision, the Board will take into account the inflation outlook, considering the monetary policy stance already attained.”
The peso erased gains from earlier in the day and weakened to 18.09 per dollar at 1:30 p.m. in Mexico City. TIIE swap rates also reversed an upward swing seen before the decision was announced.
“The forward guidance that Banxico gave is rather open. It doesn’t suggest any specific action going forward and will remain data dependent,” said Marco Oviedo, senior strategist at Brazilian brokerage XP Investimentos. “Markets could read it as the end. But again, the data will tell.”
With Thursday’s move, Banxico has increased its key rate 725 basis points over a record 15 straight meetings starting in June 2021. Borrowing costs are now higher than at any time since the central bank started targeting inflation in 2008.
“Inflation has started to slow and the US banking crisis has had repercussions in the world,” said Rodolfo Navarrete, head of analysis at Vector Casa de Bolsa SA in Mexico City, before the decision.
After remaining stubbornly close to its September peak, inflation in Latin America’s second-biggest economy decelerated to a 13-month low of 7.12% through early March. Even core inflation, which strips out volatile items and is closely watched in Mexico, has also begun to slow, hitting a six-month low of 8.15% in early March.
Yet that’s still more than twice the target of 3%, plus or minus one percentage point, explaining Banxico’s additional increase in borrowing costs.
“The bank wants to send a signal that things are falling into place, and it’s true,” said Valeria Moy, director of the Mexican Institute for Competitiveness think tank, ahead of the decision. “We’re not talking about inflation every day, and that’s the best indication that expectations are anchored.”
Economists in the most recent Citibanamex survey published last week expect inflation at the end of 2023 to be 5.2%, down from a forecast of 5.3% two weeks earlier, with the core forecast held at 5.3%. The same survey showed Banxico’s key rate ending 2023 at 11.5%, while the economy is seen growing 1.4% this year and 1.9% in 2024.
Concern over the global banking industry after the collapse of Silicon Valley Bank and the emergency buyout of Credit Suisse Group AG had fueled some speculation that Banxico’s five-member board, led by Governor Victoria Rodriguez Ceja, might consider freezing the rate.
Nonetheless, fallout from the banking turmoil did arrive in Mexico, where it has undermined somewhat the recent spectacular run by Mexico’s currency. In the past year, the peso has appreciated almost 10% against the dollar, making it the best performing currency in a basket of 31 main major currencies tracked by Bloomberg.
The peso’s appreciation has been a growing headache for exporters, whose business saw a decline in the value of total shipments in February compared to the previous year, according to data from the national statistics institute. But it had been a political win for President Andres Manuel Lopez Obrador, who is on track to be the first Mexican leader in decades to finish his term with a stronger currency than when he took office.
