Bloomberg — Mexico’s central bank kept interest rates unchanged for a fourth straight meeting and increased its inflation projections for next year, a sign that borrowing costs could stay higher for longer.
Banxico, as the central bank is known, voted to hold the key rate at 11.25% on Thursday, matching the forecasts of all 23 economists surveyed by Bloomberg. The decision is also in line with the forward guidance given by policymakers for the past four months, repeating a reference to the need to maintain borrowing costs “at its current level for an extended period.”
“The inflationary outlook will be complicated and uncertain throughout the entire forecast horizon, with upward risks,” Banxico’s board said in a statement announcing the decision, which was unanimous. “Although progress in the disinflation process has been made, the outlook is still very complex.”
The bank also boosted its inflation forecast for the first quarter of next year to 4.4%, up from 4.1% in its previous projections, on the back of the strength of activity. It now sees inflation falling inside its target range of 3%, plus or minus one point, in the third quarter of 2024, later than its previous projection of the second quarter.
“The new forecasts would mean that the central bank will be very patient. I do not discard no changes in the rate until elections take place - after June,” said Marco Oviedo, a senior strategist at XP Investimentos.
Mexico’s peso strengthened to a session high, gaining to 17.57 per dollar, after the central bank’s comments reinforced the view that it won’t begin its easing cycle until next year.
The bank’s five-member board, led by Governor Victoria Rodriguez, has looked past seven months of slowing inflation and since March kept the key rate at a record high. At the same time, the economy has surpassed policymakers’ expectations on booming trade with the US, a strong labor market and brisk domestic demand, keeping the traditionally hawkish Banxico on alert and reluctant to discuss a timeline for cuts.
While annual consumer prices rises eased to 4.44% in early September, the lowest since early 2021, core inflation which subtracts volatile items such as food and energy remains at 5.78% despite this year’s slowdown.
“The tone of the statement was slightly more hawkish, with the addition of a risk factor for inflation,” said Janneth Quiroz Zamora, director of economic analysis at Monex Casa de Bolsa. “The board recognized the resilience of the economy as a factor that could make the deceleration of inflation more gradual than was previously thought, on top of the other risks they’d mentioned previously.”
Keeping the key rate unchanged puts Mexico at odds with the easing monetary cycle started by other Latin American countries. Of the region’s five main inflation targeting central banks, Brazil, Chile and Peru have begun unwinding record tightening campaigns in the second part of 2023. Colombia, which announces it September decision on Friday, is also yet to join in.
Fiscal Threat
In addition to inflation, Banxico must now keep an eye on the threat posed by greatly increased government spending. The release by the country’s Finance Ministry of the proposed 2024 budget made clear that the government plans to run a higher deficit to finish some of its projects before the end of President Andres Manuel Lopez Obrador’s term in office in a year. Extra public spending is likely to fuel growth, as well as inflation.
At the same time, external pressures such as spiking global oil prices could be a worry for the bank going forward.
“The risks that we’re seeing now we’ve known about for some time, risks to non-core inflation, such as that energy prices would continue increasing or pressures on food prices because of climate conditions,” said Jessica Roldan, chief economist at Casa de Bolsa Finamex. “But now those risks have materialized.”
The Finance Ministry stated in its budget that economic growth would be between 2.5% and 3.5% next year, and that inflation would reach 3.8% by the end of 2024.
Analysts consider that the bank will maintain the rate through the end of 2023 and will only start reducing it in the first quarter of next year, according to a Citibanamex survey published in September.
“The economy’s strength continues to be reflected in the strong labor market, which can generate or maintain inflationary pressure,” said Joan Enric Domene Camacho, chief Latin America economist at Oxford Economics, before the decision. “In Mexico, salaries usually grow in line or above the level of inflation, and more formal and informal jobs have been created.”
--With assistance from Rafael Gayol, Alex Vasquez, Carolina Gonzalez and Michael O’Boyle.
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