The Bank of Mexico has raised interest rates more than analysts had expected as it tries to smooth over a rocky leadership transition while the country faces its highest inflation in two decades.
Banxico’s board voted 4-1 on Thursday to raise rates by 0.5 percentage points to 5.5 per cent after data showed annual inflation hit 7.37 per cent in November, its highest level in 20 years. Gerardo Esquivel, who voted against it, had instead advocated for a smaller 0.25 percentage point increase.
“The balance of risks for the trajectory of inflation within the forecast horizon deteriorated further and remains biased to the upside,” the board said in its statement.
Analysts on average had expected the five-member board to increase by 0.25 percentage points as it balances soaring price rises, fragile growth and expectations that the US Federal Reserve will begin raising rates from their current rock-bottom levels next year.
The bank simultaneously faces an internal challenge in smoothing over a turbulent transition to new leadership. In November, Andrés Manuel López Obrador, Mexico’s president, shook markets when he withdrew his nominee for central bank governor and replaced him with a little-known public sector economist.
Victoria Rodríguez Ceja has since been officially confirmed as Banxico’s next governor and will be the first woman to hold the role, although the opposition has questioned her monetary policy experience and her independence from the president.
Rodríguez Ceja, who is set to take over from current governor Alejandro Díaz de León on January 1, has vowed to fight inflation, not touch international reserves and maintain the bank’s autonomy.
Like many countries, Mexico is trying to tame soaring prices. From Brazil to Poland, central banks around the world are tightening monetary policy in an effort to contain inflation.
The US Federal Reserve is also taking a more aggressive approach, and said on Wednesday that it expects to raise interest rates three times next year.
In Mexico, the bigger rate rise was justified by the faster price rises, a higher minimum wage, weaker peso and uncertainty over the transition to a new governor, said Alonso Cervera, chief economist for Latin America at Credit Suisse.
“It was necessary for the central bank to accelerate the tightening based on the latest inflation numbers and based on other developments,” he said. However, he cautioned that this pace of tightening may not be maintained.
“The market shouldn’t conclude that it’s 50 [basis points] going forward.”
The bank is also contending with a fragile recovery in Mexico’s economy, which saw a sudden contraction in the third quarter. More recent data suggest a rebound, but analysts have revised down their gross domestic product growth projections for 2021 to 5.7 per cent, according to a monthly Banxico survey.
“Growth data have been disappointing, and the 4Q rebound does not seem to be strong,” analysts at Morgan Stanley wrote before the decision.
The peso on Thursday strengthened by the most in a month versus the dollar. It was last at 20.78 pesos to the dollar, a 6.3 per cent move from late November when it hit its weakest level in 13 months.
Uncertainty over the central bank’s leadership has weighed on foreign investment. Foreign investors pulled nearly $1.3bn from government securities in November, while foreign investments in equities also show outflows of nearly $4.8bn to November, according to analysts at BBVA.
“We would expect foreign inflows to remain stagnated, as uncertainty regarding the current tightening cycle will continue due to the probable noise resulting from the new composition of Banxico’s board,” the analysts wrote before Thursday’s decision.
Additional reporting by Kate Duguid in New York
Mexico’s central bank raises interest rates as country battles inflation
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