Bank of Mexico Reverses Rate Cut Done Four Months Ago

June 24, 2021

Mexico’s overnight interbank rate target had undergone six reductions totaling three percentage points in 2020 from 7.25% to 4.25%, and that easing cycle was culminated by a 25 basis point in February this year. Mexican real GDP had imploded 8.25% last year and experienced an eighth consecutive year-on-year drop last quarter, that time by 3.6%. When the rate was cut four months ago, inflation was at 3.5%. Despite inflation nearly doubling to 6.0% now, today’s majority but not unanimous decision to raise the rate by 25 basis points back to 4.25% had been foreseen. A released statement justifies today’s rate hike not only by the rise of total inflation. Officials note, too, that core inflation has climbed to 4.6%. Inflation expectations for 2021 have been rising, and long-term inflation expectations currently exceed the central bank’s 3% target. Officials do not anticipate inflation receded to that goal until the third quarter of next year. Latin America’s experience in the past with bouts of hyper-inflation mandate that central bankers in the region need to be particularly vigilant in responding when inflation tops target by a significant margin, even when the reason behind the overshoot stem from transitory factors.

Copyright 2021, Larry Greenberg. All rights reserved. No secondary distribution without express permission.



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