Mexico’s central bank pressed ahead and raised its benchmark lending rate by another quarter of a percentage point to 7.5 per cent - a nine-year high - as policy makers remain wary of high inflation and the uncertainty surrounding Nafta negotiations and July’s presidential elections.
The move was widely expected and analysts said failure to increase rates despite a weaker inflation reading in January would have dealt a blow to Banxico’s credibility, given the strong hints from Alejandro Díaz de León, the bank’s new governor, have been given ahead of the decision.
“In our view, this hike is not necessary and the previous one was not warranted,” BBVA Bancomer said in a note to clients. But it believed the bank’s monetary policy committee had essential tied its own hands, because it “would not be able to distance itself from the hawkishness of the last monetary policy statement and meeting minutes” without a rise. “Delivering the expected hike is now crucial for credibility as they did not leave the door open for a monetary policy pause at this meeting,” it said.
Alberto Ramos at Goldman Sachs said Mr Díaz de León and new bank board member Irene Espinosa “may wish to enhance their inflation-fighting credentials with a rate hike”.
The bank’s mandate is inflation control, so January’s fall in annual consumer prices to 5.5 per cent will be a welcome sign that, after a spike at the end of last year, the effects of a gasoline price hike a year ago are finally easing and inflation is heading back down. The central bank’s target is 3 per cent, plus or minus one point. Inflation had ended 2017 at a 16-1/2 year high of 6.8 per cent.
But Mr Ramos noted that the January headline and core inflation numbers were slightly higher than expected – so Banxico should not rest on its laurels. He believed the bank was “excessively confident that inflation will converge back to the 3 per cent target by end-2018”. Capital Economics produced the following chart breaking down annualised inflation numbers:
While some analysts had suggested that the inflation numbers could give Banxico pause, “the big picture is that the focus of Banxico will remain on keeping policy tight until July’s presidential elections – rate cuts will remain off the table until then,” Capital Economics said.
Andrés Manuel López Obrador is currently shaping up as the man to beat. A win by Amlo, as he is known, could spark a sell-off in the peso because of his perceived market-unfriendly stance.
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