Banxico moderates rate hike and takes it to 10.50%

The Governing Board of Banco de México increased the reference interest rate by 50 basis points to bring it to 10.50%, which is the highest level since May 2001.

The decision was made by majority for the second consecutive occasion, where Deputy Governor Gerardo Esquivel repeats as the dissident member in the decision, after requesting a quarter point increase.

In the statement where they reported the decision, they explicitly warned that “it will still be necessary to increase the reference rate at the next meeting.”

The next monetary meeting of the Governing Board is scheduled for February 9, eight days after the meeting scheduled by the Fed’s Federal Open Market Committee (FOMC).

“Going forward, (the) need for additional adjustments in the reference rate and their magnitude will be assessed according to the prevailing circumstances,” they specified.

After making this decision, which continues to enter restrictive territory, they considered that the greatest challenges for the conduct of monetary policy are the tightening of global financial conditions, the environment of accentuated uncertainty, the accumulated inflationary pressures of the pandemic; the geopolitical conflict and the possibility of greater effects on inflation.

As well as the monetary stance that has already been achieved in this bullish cycle that accumulates an increase of 650 basis points since June 2021.

With this decision, 13 consecutive increases in the rate were spun, since June 2021, making this period of the bullish cycle the longest since the central bank used the strategy of directly setting the target rate, in 2008.

Adjusted inflation forecasts

In the last monetary announcement of the year, the Governing Board adjusted its forecasts for inflation for the last quarter of the year and the first quarter of 2023 “marginally downwards” and moved its forecasts for quarterly variations “slightly upwards”. the last three quarters of next year.

They now project that inflation will end the last quarter of 2022 with an annual variation of 8.1%, which contrasts with the 8.3% that they forecast in November. This is the second consecutive downward adjustment in this indicator.

They argued that the so-called inflation peak was touched in the third quarter of the year, when an average annual fluctuation of 8.5% was lower than the 8.6% projected in the September decision.

They calculated that between January and March 2023 and in the second quarter of next year inflation will be at 7.5 and 5.9%, respectively, almost double the maximum target range of 4 percent.

Core core peak between October and December

According to the revised forecast of Banco de México, subjacent inflation will reach its peak in this last quarter of the year, registering an annual variation of 8.5 percent. This rate incorporates an upward revision from the 8.3% forecast at the November meeting.

Deputy Governor Jonathan Heath has explained that core inflation is a set of prices that derives from a normal relationship between supply and demand and therefore are the prices most susceptible to monetary policy actions.

The expectations contained in the monetary announcement also show upward revisions in expectations for each of the four quarters of next year.

In fact, they anticipate that core inflation will still be at 7.8% in the first quarter, which contrasts with the 7.5% expected in November and that it will close next year with an annual variation of 4.3 percent.

five risks

Core inflation forecasts, which provide information about future inflation, are subject to five upside risks:

Persistence of core inflation at high levels; external inflationary pressures derived from the pandemic; pressures on agricultural and energy prices due to the geopolitical conflict; currency depreciation and higher cost pressures.

In the statement they admitted that some shocks have shown signs of mitigation, but “the balance of risks in the expected trajectory for inflation in the forecast horizon continues to be upwards.”

Economy continues to recover

Although the sole objective of the central bank of Mexico is to seek price stability, they consider the situation of the economy to make their decisions.

In the statement they explained that in the fourth quarter, the Mexican economy continued to recover but at a slower pace.

In this way “it is expected that the slack conditions will continue to reduce.” Product slack means that there is an underutilization of resources in the face of depressed demand.

The minutes corresponding to this decision will be released on January 5, 2023, by which time we could already know if Deputy Governor Gerardo Esquivel will be ratified or not.

ymorales@eleconomista.com.mx