Mexico central bank hikes key rate, still hawkish under new leadership

Mexicos central bank on Thursday raised its benchmark interest rate by 50 basis points to 6.00%, a sixth straight rate increase that was in line with expectations, as policymakers sought to keep price pressures in check with inflation running high.

Four of the Bank of Mexicos board, including new governor Victoria Rodriguez, voted for the half a percentage point increase, while member Gerardo Esquivel voted for a 25 basis points hike to 5.75%, the bank said in a policy statement.

Saying “new governor, same script”, Nikhil Sanghani, an economist at Capital Economics, noted Rodriguez had sided with the majority in maintaining the banks hawkish stance.

“As we suspected, the new governor Victoria Rodriguez did not want to rock the boat,” Sanghani said in a research note.

Banxico said in its statement that inflationary pressures have been greater and lasted longer than anticipated, noting that forecasts for headline and core inflation were revised upwards, especially for 2022 and the first quarter of 2023.

The bank underscored that the balance of risks for the trajectory of inflation remains biased to the upside.

Analysts have said expectations the U.S. Federal Reserve will start raising rates would be top of mind for Banxico board members when considering what to do with rates at home.

Core inflation in Mexico in January surged to heights not seen since 2001, and though headline inflation eased slightly to 7.07%, it was still more than double Banxicos target rate of 3%, official data showed on Wednesday.

“With inflation likely to remain well above target over the coming months, the board remaining hawkish under the new governor, and the Fed set to start hiking too, its clear that the tightening cycle has further to run,” Sanghani said.

He forecast three more 50 basis point hikes in the coming months, taking the policy rate to 7.50%. After that, as headline and core inflation eased towards target, “policymakers should take their foot off the brake pedal,” he said.