Mexico inflation risks on upside, say bank rate setters

27 Aug 2021

The majority of members of the Mexican central bank’s rate setting board said the balance of inflation risks were leaning towards the upside when they hiked the benchmark rate to 4.50% earlier in August.

This is according to the minutes of the central bank’s last meeting.

On 12 August, the bank revealed its key interest rate rose 25 basis points in an attempt to curb price pressures. Further hikes are forecast for the remainder of the year, despite two out of five board members voting to keep borrowing costs the same.

Annual inflation at the beginning of the month fell to 5.58% as per data published earlier this week. However, it remained over the bank’s target rate of 3%, with a tolerance threshold of one percentage point above and below 3%, Reuters reports.

Furthermore, most of the bank’s board said inflation has stayed over the bank’s target for a number of months, with most saying the headline and core inflation trajectories had been upwardly revised.

The minutes said: “The majority of members pointed out that pressures on inflation are associated with shocks that are expected to be transitory. Nevertheless, the majority mentioned the risk that the price formation process is affected.”

Moreover, most of the rate setters also underscored the stability of the peso exchange rate and its robust performance compared to emerging market currencies.

The Mexican economy has struggled to rally following the impact of the Covid crisis, with most of the bank’s board members saying the recovery was still weak.

The board’s two opponents Galia Borja and Gerardo Esquivel both referred to the inflation’s transitory nature, whilst the latter also cautioned that another rate rise could be counter-productive.

Esquivel said holding the reference rate “did not jeopardise the convergence” of inflation to its target. “On the contrary, raising it again could send the wrong signal that the current inflation is of a more permanent nature, which in turn could affect short- and medium-term expectations, as well as the price formation process,” Esquivel said, as per the minutes.