Mexico’s central bank prepares to raise interest rates further to combat inflation

Mexico’s central bank prepares to raise interest rates further to combat inflation


The Bank of Mexico is expected to raise interest rates for the fifth consecutive time on Thursday as it tries to weather the difficult leadership transition as the country faces its highest inflation in 20 years.

Analysts believe that a five-person board of directors will raise the key interest rate by 25 basis points to 5.25%, although some believe it is possible to raise interest rates by 50 basis points because it can balance soaring price increases, fragile growth and the Fed’s Expectations. Interest rate hikes will begin next year.

During the smooth transition to the new leadership, the bank also faced internal challenges. In November, Mexican President Andrés Manuel López Obrador (Andrés Manuel López Obrador), Shake the market When he withdrew his nomination for central bank governor, he was replaced by a lesser-known public sector economist.

Victoria Rodríguez Ceja has been officially confirmed as Banxico’s next president and will be the first woman to hold that position, although the opposition questioned her monetary policy experience and her independence from the president.

Rodríguez Ceja will succeed Alejandro Díaz de León on January 1. He vowed to fight inflation, not touch international reserves and maintain the autonomy of the bank.

Like many countries, Mexico is struggling to control soaring prices. The annual inflation rate in November reached 7.37%, the highest level in 20 years.from Brazil For Poland, central banks around the world are tightening monetary policy to curb inflation.

JPMorgan Chase analysts wrote that, given the unexpected rise in inflation, the expectation that the Fed will raise interest rates next year, and the fact that Banxico started this tightening cycle from higher interest rates in other emerging markets, the interest rate decision on Thursday will be a difficult decision. .

“Diaz de Leon’s swan song will be his toughest song,” they wrote.

The bank is also struggling to cope with the fragile recovery of the Mexican economy, which suddenly contracted in the third quarter. Recent data shows a rebound, but according to monthly reports, analysts have lowered their GDP growth forecast for 2021 to 5.7%. Banxico survey.

“The growth data is disappointing, and the rebound in the fourth quarter does not appear to be strong,” Morgan Stanley analysts wrote.

The uncertainty of Banxico changes also has an impact. The November nomination of Rodríguez Ceja took a hit to the peso. The peso has rebounded from a low point, but compared with the Friday before the news, the exchange rate against the US dollar is still down by 1.9%. It is currently trading at 21.2.

According to BBVA analysts, in November, foreign investors withdrew nearly US$1.3 billion from government securities, and foreign investment in Mexican stocks also showed an outflow of nearly US$4.8 billion until November.

The analyst wrote: “We expect foreign capital inflows to continue to stagnate, because the new composition of Banxico’s board of directors may generate noise and the uncertainty of the current tightening cycle will continue.”

Additional report by Eric Platt in New York

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