Mexico and Peru’s Central Banks Forecast to Hold

Mexico and Peru are forecast to maintain borrowing costs at their current levels Thursday, as both central banks focus on ensuring disinflation is fully consolidated.

(Bloomberg) — Mexico and Peru are forecast to maintain borrowing costs at their current levels Thursday, as both central banks focus on ensuring disinflation is fully consolidated.

Mexico’s central bank, known as Banxico, led by Governor Victoria Rodriguez, kept its key rate at 11.25% at its May and June meetings after a record tightening cycle pushed the key rate up 725 basis points since mid-2021. In Peru, policymakers led by bank chief Julio Velarde have been on hold since hitting the 7.75% peak of their 750 basis-point hiking campaign in January.

Banxico’s five-member board pledged to hold rates unchanged for a prolonged period, without defining exactly how long that might be. Cooling inflation has left some room for Rodriguez and her colleagues to consider easing, but analysts predict they’ll wait until year-end.

Among the region’s big inflation-targeting central banks, Chile and Brazil have already started to lower borrowing costs, while economists surveyed by Bloomberg expect Peru to begin easing monetary policy in the third quarter with Colombia and Mexico on board by year-end.

At the bank’s June meeting, members of Banxico’s board were hesitant to even broach the subject of a cut, saying that it was far too early, and they needed to observe the behavior of inflation, according to minutes released after the discussion.

Mexico’s Inflation Fixation

Mexico’s consumer price increases slowed in line with expectations in July to 4.79% from a year earlier, down from 5.06% the month before. Core inflation, which excludes volatile items such as food and fuel, remained elevated, at 6.64%, slightly below the median estimate of economists surveyed by Bloomberg.

Mexico’s rate is at the highest level since the bank started inflation-targeting in 2008. Deputy Governor Jonathan Heath said it was likely to stay that way even if the US Federal Reserve votes for a hike in the near future. All 26 analysts in a Bloomberg survey expect Banxico to hold at 11.25% on Thursday.

“The probability that there will be changes to the key rate are practically zero. The tension that we have to keep our eyes on this Thursday has to do with what they say in the forward guidance,” said Janneth Quiroz Zamora, director of economic analysis at Monex Casa de Bolsa.

What Bloomberg Economics Says

We expect Banxico to vote unanimously to hold its benchmark rate at 11.25% on Aug. 10 for a third consecutive meeting. Forward guidance will reiterate that policymakers anticipate staying on hold for a long time. Tight monetary conditions and decelerating inflation show no need for more hikes. High inflation expectations and strong domestic demand limit room for cuts. Risks from El Niño and uncertainty about external financial conditions are also constraints.  

– Felipe Hernandez, Bloomberg Economist

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The bank had previously kept a close eye on the spread between its rate and that of the US, which has contributed to making the Mexican peso one of the world’s best performing currencies in 2023. As of Wednesday, it’s gained over 14% against the US dollar this year, second only to Colombia’s peso among emerging-market peers.

The stubbornness of core inflation has been one of the main factors concerning policymakers, since it remains more than double the bank’s 3% target, plus or minus one percentage point. For that reason, economists are predicting Banxico will remain on hold Thursday and again at September’s meeting, with others expecting the bank will hold until mid-2024.

“There are still a lot of upward risks — the first is that the economy will continue to surprise to the upside with a much stronger inertia than we had expected and a strong labor market,” said Joan Enric Domene Camacho, senior Latin America economist at Oxford Economics Ltd. before the decision.

“The second is that the possibility there won’t be a recession in developed economies has started to generate a spike in international energy prices,” she said.

Peru’s Likely Hold

In Peru, the central bank is expected to hold interest rates for a seventh straight month, as inflation continues to cool but remains significantly above the central bank’s target range of 1% to 3%.

Thirteen of 14 analysts surveyed by Bloomberg expect the bank to keep borrowing costs at a 22-year high while one sees a quarter-point cut. Analysts do forecast that the central bank will begin cutting rates before year-end, especially given the economy’s current trajectory, which appears headed toward a mild recession.

Bank chief Velarde, among the world’s longest serving top central bankers, has said repeatedly that he is wary of cutting prematurely only to have to raise them again soon after. Statements by the central bank so far have not ruled out potential rate increases in case inflation were to bounce back, although that scenario seems increasingly unlikely.

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