Mexico, Colombia Leave Door Open for New Rate Hikes on Inflation

Mexico and Colombia, two of the most hawkish central banks in Latin America, are refusing to call a halt to their record monetary policy tightening cycles even after increasing rates again on Thursday.

(Bloomberg) — Mexico and Colombia, two of the most hawkish central banks in Latin America, are refusing to call a halt to their record monetary policy tightening cycles even after increasing rates again on Thursday.

Both central banks followed the expectation of most economists and increased borrowing costs by 25 basis points each as they fight stubbornly high inflation expectations. In the case of Banxico, as the Mexican central bank is known, borrowing costs were increased to 11.25% while Colombia boosted its overnight benchmark rate to 13%. The decisions were taken unanimously by the board of both banks.

While the decisions leave both nations closer to Brazil, Chile and Peru in stopping the aggressive borrowing cost increases initiated in 2021 with the recovery from the Covid-19 pandemic, the statements accompanying their announcements refrain from making that call explicitly. 

Banxico, which has given forward guidance intermittently in the past, switched to data-dependent mode by saying its next decision will depend on the inflation outlook, a message echoed by its Colombian peers. 

“The successive decisions to be adopted by the board will depend on new available information,” Banco de la Republica, as the Colombian central bank is known, said in its statement Thursday.

Mexico’s swap rates sank and the peso trimmed its daily advance after the decision as traders expect policymakers will be less hawkish going forward. Colombia’s markets were already closed.

What Bloomberg Economics Says 

“We expect policymakers to remain cautious, keeping the door open for additional moves if data warrant. We believe inflation dynamics in Colombia look more challenging and imply a higher risk of additional tightening or high rates for longer.”

— Felipe Hernandez, Latin America economist

— Click here to read his report on Mexico and here for his report on Colombia

Colombia and Mexico are home to the only top inflation-targeting central banks in Latin America that are still raising borrowing costs after Brazil reached its terminal rate in August, Chile in October and Peru in January of this year. 

Yet, unlike Colombia, Mexico is finally seeing some positive news in the fight against inflation, with bi-weekly price gains decelerating to 7.12% in early March, the lowest in over a year. Core inflation, which excludes volatile items such as fuel, also slowed to 8.15% even if it remains far above Banxico’s target range.

“It was slightly less hawkish than what they published in February,” Janneth Quiroz Zamora, vice president of economic research at Monex Casa de Bolsa, said about Banxico’s statement on Thursday. “This position shows that the board is recognizing that its monetary policy is already fairly restrictive, but leaving the door open to evaluate how inflation evolves.”

In Colombia’s case, annual inflation kept accelerating in February to 13.28%, the fastest since 1999, driven by food and fuel price increases and indexation effects from high real wage gains. 

That ranks as the quickest among major regional economies with the exception of turbulent Argentina, where inflation is now above 100%. However, pressures on the price of imported goods and services have eased somewhat after the peso advanced more than 4% in March to its strongest level against the dollar in two months.

Colombia’s decision takes its interest rate to its highest level since the bank implemented its inflation-targeting strategy in 2000. But it is also expected to be one of the last increases in the bank’s 11.25 percentage-point tightening cycle, which began in late 2021. Economists surveyed by Banco de la Republica forecast that rate hikes will end at 13.25% after the next decision meeting in a month.

“The inflation rate is approaching its ceiling, from where it would start its expected descent for 2023,” Governor Leonardo Villar told reporters after the bank’s meeting in Bogota. “Economic activity continues to be characterized by an important slowdown.”

Read More: Colombian Bonds Will Get a Major New Buyer, Finance Chief Says

–With assistance from Carolina Gonzalez, Rafael Gayol and Maria Elena Vizcaino.

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