Banxico enacts bigger-than-forecast rate hike, signals smaller hikes going forward

Banxico enacts bigger-than-forecast rate hike, signals smaller hikes going forward

By Brendan OBoyle and Anthony Esposito

MEXICO CITY (Reuters) – The Bank of Mexicos five-member governing board unanimously voted to increase the benchmark interest rate by 50 basis points to 11.00% on Thursday, above market forecasts, citing a complex inflation scenario and suggesting future hikes would be smaller.

The decision by Banxico, as the central bank is known, comes hours after data showed consumer prices in Latin Americas second largest economy rising in January above December readings and market expectations.

“Given the dynamics of core inflation, on this occasion it is necessary to continue with the magnitude of the reference rate adjustment of the previous policy meeting, in order to be in a better position to tackle a still complex inflation environment,” Banxico said in its post-meeting statement.

Mexico‘s peso currency appreciated sharply, and was up 0.9% versus the U.S. dollar, following Banxico’s bigger-than-forecast interest rate hike.

Banxico was widely expected to increase the key rate by 25 basis points, following in the footsteps of the U.S. Federal Reserve.

“The decision was unanimous. The authority is thus sending a strong message in its fight against inflation,” CI Banco said in a note to clients.

Banxico has now raised its benchmark interest rate by 700 basis points during the current hiking cycle, which began in June 2021, as inflation surged past the banks target rate of 3%, plus or minus one percentage point.

While inflation has been easing since hitting an over 20 year high of 8.70% in August and September last year, it still remains far above Banxicos target.

Banxico suggested that its rate hiking cycle was not over, but that future increases could be smaller.

“The board considers that, given the monetary policy stance already attained and depending on the evolution of incoming data, for its next policy meeting, the upward adjustment to the reference rate could be of lower magnitude,” the Mexican central bank said.

(Reporting by Anthony Esposito and Brendan OBoyle; Additional reporting by Noe Torres; Editing by Chris Reese and Diane Craft)