Mexican Peso

Mexican peso falls after Banxico’s interest rate hike

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The Mexican peso dipped on Thursday (August 13) as the country’s central bank, known as Banxico, decided to raise its benchmark policy rate by 25 bps to 4.50%, after a surprise hike in June that did little to tame inflation.

Voting in favor of the decision were Banxico Governor Alejandro Díaz de León, and board members Irene Espinosa, and Jonathan Heath. Members Galia Borja and Gerardo Esquivel were in favor of keeping the interest rate unchanged at 4.25%.

All 22 economists surveyed by Bloomberg predicted Thursday’s increase while 17 of 19 analysts surveyed by Reuters predicted a 25-basis-point increase. More increases are expected this year.

The governing board said the recovery of the Mexican economy continued during the second quarter and is expected to continue for the rest of the year, although risks persist.

The Mexican economy expanded at a record 19.7% year-on-year in the second quarter of 2021, the first increase in over 2 years.

The second largest economy in Latin America after Brazil, plummeted 8.3% last year, its worst performance since the 1930s.

Policy makers also expressed concern about inflation. Expectations of headline and core inflation in 2021 rose again, while medium and long-term inflation remained relatively stable at levels above the bank’s 3% target.

Mexico Interest Rate
(Source: Banxico)

“Although the shocks that have increased inflation are expected to be transitory, due to their variety, magnitude, and the extended horizon over which they have affected it, they may pose risks to the price formation process,” Banxico said.

Annual inflation eased for a third straight month to 5.81% in July from 5.88% in June but slightly above market expectations of 5.77% and well above the bank’s stated objective.

“It was deemed necessary to strengthen the monetary policy stance in order to avoid adverse effects on inflation expectations and enable an orderly adjustment of relative prices and the convergence of inflation to the 3% target,” the central bank said.

The annual core inflation rate, excluding food and energy products which are too volatile, rose to 4.66% in July, the highest since last November, from 4.58% in the previous month. On a monthly basis, consumer prices went up 0.59%, following a 0.53% increase in the prior month, slightly above market forecasts of a 0.55% rise.

Of note, inflation is accelerating not only in emerging markets but in the U.S. as well.

The bank also adjusted its inflation forecast upwards. For the end of 2021, Banxico forecast headline annual inflation of 5.7%, up from a prior projection of 4.8%, and core annual inflation of 5.0%, up from 3.9% previously.

The Mexican Ministry of Finance has forecast an economic growth of up to 6% this year.

The Mexican peso fell 0.12% (at 1909 GMT) on Thursday (August 12). The currency remains near 20 against the US dollar in the second week of August, the weakest level in roughly three weeks as crude oil prices resumed the downward momentum and as investors rushed to the greenback amid expectations the US Federal Reserve is closer to scaling back its expansive monetary policy.

Banxico has still has three more rate decisions scheduled before its Governor ends his term at the end of the year.