Mexico’s central bank, known as Banxico, has announced that it will maintain its record-high interest rates for the next two meetings before considering a potential easing of monetary policy. Governor Victoria Rodriguez stated during a presentation of the bank’s quarterly report that policymakers have not set a specific timeline for rate cuts from the current level of 11.25%. She emphasised the importance of thoroughly evaluating the inflationary outlook and risks, taking into account factors such as the potential recession in the US.
Having recently concluded its record tightening cycle on May 18, during which the key rate was raised by 725 basis points over 15 consecutive hikes starting in June 2021, the central bank is now facing borrowing costs at their highest level since 2008 when inflation targeting began. The bank has revised its projections for consumer price increases, lowering the forecast to 4.7% by the end of 2023 from the previous 4.9% stated in the March 1 publication. While inflation has decelerated since reaching a peak of 8.8% in August, it still remains above the bank’s 3% target.
Banxico Deputy Governor Irene Espinosa echoed Rodriguez’s sentiments, stating that the bank will maintain a restrictive stance on interest rates. She emphasised the persistence of high inflation, particularly core inflation, and expressed skepticism about the possibility of rate cuts starting in September. These statements contributed to the weakening of the Mexican peso against other emerging-market currencies.
In terms of GDP projections, Banxico has increased its forecast for Mexico’s economic growth in 2023. The central bank now expects gross domestic product to expand by 2.3% this year, up from the previous forecast of 1.6% stated in the March 1 report. However, the bank has revised down its GDP growth expectation for 2024 to 1.6% from 1.8%. The Mexican economy has benefited from sustained domestic consumption, strong foreign demand, and record-high exports to the US. Remittance flows have also played a significant role in supporting the economy. Despite the improved growth outlook, policymakers remain cautious and indicate that interest rates will need to remain at restrictive levels for an extended period.
According to economists surveyed by Citibanamex, the growth forecast for 2023 remains at 1.9%, an increase from the 1% forecast in early February. These economists also predict that the central bank’s key rate will remain unchanged at its current level throughout the year.
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