Another Hike of Mexico’s Overnight Interbank Interest Rate Target

May 12, 2022

The Bank of Mexico’s Governing Board was still in an accommodating mood one year after the pandemic’s onset and made one final cut of its policy interest rate in February. But as inflation in Mexico and around the world began to heat up that spring, it did not take the central bank officials long to switch priorities. A 25-basis point hike in June was followed by three more such hikes in August, September and November. In December before U.S. monetary officials began to even ruminate about higher rates coming soon, Mexico’s Governing Board implemented its fifth rate increase and doubled its size to 50 basis points. Hikes of that size followed in February, March and now May, and today’s 5-1 decision included one dissenting vote from Board member Irene Espinosa favoring an increase of 75 basis points. In all, the rate has increased three full percentage points to 7.0% in the space of just 11 months.

But the 7.0% new rate level is still slightly below year-on-year CPI inflation of 7.68% and even a tad under core inflation of 7.22%. According to a released statement, the main purpose of the tightening is the need to return inflation to its 3% target withing the operative period through 2024 of that mandate. Officials concede that the war in Ukraine injects a fresh inflationary impulse into the outlook and that inflation will likely crest above and later than envisaged earlier. Note is made that many other central banks around the world are tightening their stances for the same reason. So far, Mexican growth is exhibited resilience, and notice is served that the tightening is not done: “Given the growing complexity in the environment for inflation and its expectations, taking more forceful measures to attain the inflation target may be considered.”

Copyright 2022, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

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