Mexico Halts Steepest-Ever Series of Interest Rate Hikes as Inflation Slows

Mexico halted its steepest-ever series of interest rate rises and promised to keep them stable for an extended period after inflation slowed sharply and the peso rallied to a seven-year high.

(Bloomberg) — Mexico halted its steepest-ever series of interest rate rises and promised to keep them stable for an extended period after inflation slowed sharply and the peso rallied to a seven-year high. 

The central bank held its key rate at 11.25% on Thursday, the first board meeting in two years where policymakers didn’t raise borrowing costs. The unanimous decision was in line with expectations. 

“The inflationary outlook will be complicated and uncertain throughout the entire forecast horizon, with upward risks,” policymakers wrote in a statement accompanying their decision. “It will be necessary to maintain the reference rate at its current level for an extended period” in order to bring inflation to the target.

Brazil, Peru and Chile have already halted monetary tightening, and Colombia is forecast to follow suit next month. Investors are now trying to gauge when Latin America’s major economies will start to cut interest rates as inflationary pressures and economic growth cool across the region. 

Mexico’s annual inflation slowed to an 18-month low of 6.25% last month, which is still more than double the 3% target. 

The central bank’s battle to tame inflation was helped by the peso, which has been the top performer in emerging markets this year. This month, the currency reached 17.43 per dollar, its strongest level since 2016, as investors were attracted by Mexico’s high interest rates.

Read more: Mexican Peso Will Remain the EM Carry Trade à La Mode

“While the decision was fairly priced in, some in the market seemed to believe that Banxico could deliver one more hike. In that context, you can get some marginal weakness in the peso,” said Alberto Rojas, senior economist for emerging markets at Credit Suisse Group AG. “The comment that the monetary stance will remain at its level for a prolonged period should actually prove supportive of the currency over the near-term, in my view.”

The peso traded at 17.75 per US dollar just after the decision, before regaining its pre-decision level of 17.70 within minutes.

Before Thursday’s decision, Banxico had increased its key rate 725 basis points over a record 15 straight hikes starting in June 2021. Borrowing costs are now higher than at any time since the central bank started targeting inflation in 2008. 

The bank revised its inflation estimates for the rest of 2023, predicting the annual pace would be 5.2% in the third quarter, down from 5.3% in its prior estimate in March, and 4.7% in the fourth quarter, down from the prior prediction of 4.8%. By the end of 2024, the bank see it at 3.1%.

“Since the bank made the decision unanimously, it’s sending the message that everyone on the board agrees in thinking that they have moved into the passive phase of the monetary policy cycle,” said Janneth Quiroz Zamora, vice president of economic research at Monex Casa de Bolsa. 

Growth Outlook

Mexican economic growth was stronger than expected in the first quarter, helped by strong demand from the US. In March, exports reached an all-time high of $53.6 billion. 

But with a likely slowdown in the world’s largest economy, Mexico’s growth is also forecast to cool. 

Mexico’s economy will expand 1.8% this year, from 3.1% in 2022, according to an estimate by the International Monetary Fund. That would be faster growth than in Brazil, Colombia and Chile, though slower than Peru’s, according to the IMF.

“The Mexican economy likely will be more resilient than in previous cycles to a US recession, but we doubt it will be unscathed,” Andres Abadia, chief Latin American economist at Pantheon Macroeconomics, wrote in a note. “The Board likely will be able to ease in late Q3.” 

–With assistance from Rafael Gayol and Robert Jameson.

(Updates with central bank in third, analyst comments starting in seventh, inflation forecast in ninth paragraph)

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