(Bloomberg) — Mexico kept borrowing costs at a record high for a sixth straight meeting and raised its inflation forecasts for much of 2024 on Thursday, causing the peso to reverse losses as traders saw diminished odds of a quick series of cuts early next year.
Banxico, as the central bank is known, held its key interest rate at 11.25%, as forecast by 24 of 25 economists in a Bloomberg survey. One analyst expected a quarter-point cut to 11%.
Booming exports to the US, Mexico’s biggest trading partner, and strong domestic demand have made for a far longer process of disinflation than Banxico expected when prices peaked in 2022. As such, Governor Victoria Rodriguez won’t be hurried, making clear last month that rate-cut discussions could begin in early 2024 but none would take place this year.
The bank continued to say it will hold rates “for some time,” after changing that guidance in its November decision from the more hawkish phrase of “for an extended period,” leading analysts to predict a cut in February is now unlikely.
Mexico’s peso reversed losses to firm as much as 0.4% to 17.1714 after its statement gave no dovish hints. Earlier, the peso had weakened on bets that Mexico’s central bank could move quickly after the US Federal Reserve signaled this week that it will cut rates next year.
Read more: Banxico Chief Sees Chance of Rate Cut in Early 2024 Amid Split
“This is basically a ‘hawkish hold.’ After the ‘dovish hold’ by the Fed yesterday, many in the market may have been expecting a more dovish Banxico, which did not materialize and hence we saw an immediate movement to a stronger” peso, said Carlos Capistran, Bank of America’s chief economist for Canada and Mexico, in an emailed comment to Bloomberg.
The bank revised its inflation forecast for headline inflation in the second through fourth quarters of 2024, suggesting readings would be slightly higher than previously expected in that period. The upward revision is due to a slower-than-expected decline in food merchandise and services inflation, the board said.
It also raised its forecast for core inflation, which strips out volatile items, by 0.2 point for first through fourth quarters of 2024.
According to the minutes of the bank’s November meeting, some members remained cautious. These policymakers argued for the need to keep an eye on the data in Mexico before deciding exactly when to begin lowering the highest benchmark rate since the bank started targeting inflation in 2008.
“It seems that the option to cut the rate in February is off the table. In this context, the carry will remain attractive in the short term and the peso can maintain its relative strength,” said Miguel Iturribarria, a strategist at BBVA Mexico.
What Bloomberg Economics Says
“Forward guidance accompanying the Mexican central bank’s rate hold on Thursday kept the door open for slow rate cuts to begin in the first quarter of 2024 if new economic data remain in line with policymakers’ base-case scenario. A small upward revision to inflation forecasts for next year don’t alter the outlook, in our view. More favorable external financial conditions after the dovish tilt at Wednesday’s FOMC meeting provide Banxico with additional policy flexibility and increase the probability of an initial cut in 1Q24.”
The current prolonged hold, even while other countries in Latin America have set about easing, comes after a 22-month, 725 basis-point hiking campaign to rein in consumer price increases.
Inflation accelerated to 4.32% in November from 4.26% in October — down from last year’s peak of 8.7% and near a 2 1/2 year low — and remains above the target of 3%, plus or minus a percentage point. Economists in Citi’s most recent survey see it quickening further this month to leave the 2023 year-end print at 4.55%.
The core reading, a closely watched metric that strips out volatile items like fuel, decelerated to 5.30%, slightly below economists’ expectations.
Latin American banks keep a close eye on the difference between their own benchmark lending rates and the Fed’s, to avoid outflows of capital, though Banxico board members have long insisted they make decisions independently.
Read more: Traders Boost Global Rate-Cut Wagers After Fed’s Dovish Pivot
Banxico is also acutely aware of concerns in some quarters that keeping borrowing costs too high for too long could backfire.
“Services consumption data is showing a deceleration due to the high reference rate,” said Andres Abadia, chief Latin America economist at Pantheon Macroeconomics, before the decision. “Keeping the rate at this level is going to be dangerous for the level of activity.”
Source: BNN Bloomberg