Mexico Holds Key Rate for Second Month on Inflation, Peso

Maya Averbuch
·4-min read

(Bloomberg) -- Mexico kept borrowing costs unchanged near a record high Thursday, as the combination of still rising consumer prices and peso volatility sidelined the central bank for a second straight meeting.

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Banxico, as the central bank is known, held the key rate at 11% in a decision that had been forecast by 25 of 27 analysts surveyed by Bloomberg. It was a split decision, with deputy Governor Omar Mejia voting for a quarter-point cut with the other four members of the board voting in favor of the hold.

Mexico’s policymakers in March became the last of Latin America’s big central banks to finally begin easing with inflation largely in retreat across the region. Since that meeting, though, annual consumer price readings in Mexico have risen for three straight months, the services component remains persistently elevated and a plunge by the peso threatens to pressure prices and unmoored inflation expectations.

“Looking ahead, the Board foresees that the inflationary environment may allow for discussing reference rate adjustments. It will take into account the prospects that global shocks will continue dissipating and the effects of a weaker-than-anticipated economic activity,” the bank said in the statement accompany the decision.

“It is a dovish hold, Banxico is putting some weight to weaker economic activity and definitely not closing the door to cuts,” said Marco Oviedo, a strategist at XP Inc. “In fact, I think if things get quieter during the summer, a cut in August cannot be discarded.”

The process of disinflation in Mexico has been protracted and bumpy but when Banxico delivered its initial quarter-point cut, the most recent inflation data were cooling. The headline reading had slowed to 4.4%, still above the top of Banxico’s target, but nearly half the 8.7% cycle peak. The central bank targets inflation of 3% plus or minus 1 percentage point. Banxico forecast in its statement that inflation would reach the 3% target in the fourth quarter of 2025.

Since then, rising inflation prints and a post-June 2 election rout that sent the peso tumbling to a 15-month low may have pushed back any additional easing by months. The majority of analysts in the most recent Citibanamex survey see the next cut in September whereas just a month earlier most had seen a reduction this month.

Jessica Roldan, chief economist at Casa de Bolsa Finamex, also says the most recent statement makes it look more likely the next cut will be in August. The bank’s outlook on growth was more “pessimistic,” she said. And in the statement, the bank indicated that the currency depreciation’s effect on inflation “are partly offset” by weaker prospects for economic activity.

In June so far, the peso has lost over 7% of its value, turning it into the worst-performing currency worldwide after being one of the best for much of the year, as investors saw Mexico as a safe haven, the high interest rates as appealing, and the floating currency as easy to trade at any hour.

“We still see important risks, and the board is worried about the services component” of inflation, said Janneth Quiroz Zamora, director of economic research at Monex Casa de Bolsa, before Thursday’s decision. “That coincided with the uptick in the exchange rate, which could generate pressure on imported goods.”

The post-election jump in peso volatility ushers in a fresh round of problems. Governor Victoria Rodriguez said in a June 12 financial stability report that the bank could intervene if there was atypical behavior in the markets, though she did not pledge to do so.

“The last vote to hold May 9 was 5-0 and so a dovish crack is forming and that’s marginally negative for MXN,” said Win Thin, managing director at Brown Brothers Harriman & Co. in New York. “Bottom line, Banxico remains cautious.”

Data on inflation in early June showed that consumer prices rose 4.78% compared to a year earlier. Core inflation, a metric that discounts volatile items such as food and fuel, also showed an acceleration of price-rises to 4.17%. Drought contributed in large part to the rise in produce prices.

With a possible economic slowdown on the horizon, and analysts projecting growth of 2.1% in 2024 and 1.7% in 2025, incoming President Claudia Sheinbaum has promised more government spending on social programs, fiscal responsibility and delaying major works until 2026.

Investor concern about Mexico’s next few months center on a set of constitutional changes proposed by President Andres Manuel Lopez Obrador, who will be in power until the end of September.

Sheinbaum has broadly supported his plans, and the new congress appears to have enough participation of the ruling party and its allies in order to approve the bills.

--With assistance from Rafael Gayol, Michael O'Boyle, Maria Elena Vizcaino and Carolina Gonzalez.

(Update with Banxico statement in fourth paragraph, analyst comments starting in fifth, forecast in sixth.)

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