Bank of Mexico review: growing confidence in policy management


■ Bank of Mexico raises policy rate to 10.50%, but on track to end rate hikes.
■ The environment surrounding Mexico is still unpredictable and the situation needs to be monitored closely over prices and the economy.

  On 15 December, the Bank of Mexico held its last monetary policy meeting of the year. The policy rate was raised from 10.00% to 10.50%, bringing the cumulative rate increase since last June to 6.50%. The vote was 4-1 in favour, but Deputy Governor Esquivel, who was opposed, proposed a 25 bps rate hike. The Bank of Mexico has indicated that it may raise rates at least one more time, and it is highly likely that additional rate hikes will be implemented over the first half of next year. At the time of writing, the market consensus is for a final rate hike (terminal rate) of 11.00%.

  The Bank of Mexico has now reduced the range of its previous four consecutive 75 bps rate hikes, which it interpreted as a steady adjustment in monetary policy, although it had indicated at its November policy meeting that it would end the rate hike cycle in the near future.Confirming information dissemination since the November policy meeting, on 30 November the Bank of Mexico stated that price increase was likely to have already peaked. On 6 December, Deputy Governor Heath, who had been seen as aggressive in raising interest rates, suggested a slowdown in the pace of rate hikes at the December meeting. The Financial Stability Report published the following day noted that the vulnerabilities and risks seen in the new Corona disaster had weakened for the domestic financial system. The Bank of Mexico appears to be growing more confident about its future policy management. This is a relief for investors.

  However, it would be premature to assume that the environment surrounding Mexico will improve significantly in the first half of next year, as the consumer price index rose by 7.8% y/y in November, the smallest increase since May this year for the composite, but the core index, excluding some food and energy, rose by 8.51% y/y, still a large deviation from the Central Bank's target range (2-4% y/y). %), which is still a significant deviation from the Central Bank's target range (2-4%). In addition, on 1 December, business owners, labour representatives and the Government agreed to a 20% increase in the minimum wage next year, which could lead to further price increases. Furthermore, the UN Economic Commission for Latin America and the Caribbean (ECLAC) published on 15 December its forecast for economic growth next year, which was revised sharply downwards from 2.9% to 1.1%. It is expected that the development will continue to be swung by developments in the neighbouring US economy.