Split Bank of Mexico raises rate to record 10%, leaves door open to future hikes

The Bank of Mexico hiked its key interest rate by 75 basis points to a record 10.00% on Thursday, in a split decision that left the door open to future hikes but cast doubt on how aggressively it would continue its monetary tightening cycle.

It was the fourth consecutive three-quarters of a percentage point increase and was in line with forecasts, following the U.S. Federal Reserve’s recent 75 basis point hike increase last week.

In a departure from recent decisions, the bank’s five board members did not vote unanimously for the increase, with Deputy Governor Gerardo Esquivel voting to hike the key rate by 50 basis points.

Esquivel told Reuters last month he saw the bank’s current rate-hiking cycle ending with rates between 10% and 10.25%, while a central bank survey of analysts last month predicted Mexico would end 2022 with a rate of 10.50%.

Banxico, as Mexico’s central bank is called, said that at its “next meetings, the board will assess the magnitude of the upward adjustments to the reference rate based on the prevailing conditions.”

The bank has raised its target rate by 600 basis points since June 2021, as inflation has blown past its target rate of 3%, plus or minus one percentage point.

The latest hike came just hours after President Andres Manuel Lopez Obrador warned in a news conference that raising rates could slow down the economy.

“I very much question the fact that everywhere the formula to lower inflation is to increase (interest) rates, but this is inconvenient for the economy because credit becomes more expensive,” the president said.

Inflation in Mexico slowed in October, official data on Wednesday showed, reaching an annual headline rate of 8.41%, down from the 8.7% annual rate the prior month.

Banxico reiterated that inflation is projected to converge to its 3% target in the third quarter of 2024, and added that forecasts for average annual inflation for the fourth quarter now stand at 8.3%, down from a prior view of 8.6%.

Still, the bank said that “although some shocks show signs of subsiding, the balance of risks that might have an incidence on the trajectory of inflation within the forecast horizon remains biased to the upside.”

Banxico’s recognition of “subsiding” shocks, as well as the board’s split decision, indicate that “the board may be becoming a little less hawkish,” said Jason Tuvey, senior emerging markets economist at Capital Economics.

“The debate at Banxico is starting to shift to how much more tightening to deliver and we think the end of the cycle is drawing near,” wrote Tuvey in an analysis note.

Goldman Sachs economist Alberto Ramos projected that Banxico will hike rates by 50 basis points at its final meeting of the year on Dec. 15.

One bright spot Banxico sees for Mexico’s economy is the Mexican peso’s recent appreciation, with the bank underscoring its “greater resilience than other currencies.”

The peso hit a more than 2-1/2 year high in Thursday trading, up over 1% at 19.36 per dollar.

Earlier, Lopez Obrador said the peso’s strength is good for the economy.