Mexico’s Central Bank Might Consider Disengaging From US Fed, Deputy Governor Says

Banxico started its cycle of interest rate increases earlier than the Fed and also has a slightly higher inflation target, says Gerardo Esquivel

Mexico's central bank delivered three consecutive 75-basis point rate increases between June and September, matching the magnitude of hikes delivered by its US counterpart in the same period.
By Carolina Gonzalez
October 19, 2022 | 05:00 PM

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Bloomberg — Mexico’s central bank can start considering disassociating its monetary policy decisions from the US Federal Reserve as inflation appears to have peaked in August, Deputy Governor Gerardo Esquivel said.

Banxico, as the central bank is known, started its cycle of interest rate increases earlier than the Fed and also has a slightly higher inflation target so “we are in a better position to achieve convergence, at this moment, than the United States,” he said.

“We can start talking about decoupling our decisions with respect to that country,” Esquivel told a podcast organized by Grupo Financiero Banorte released Wednesday.

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The central bank delivered three consecutive 75-basis point rate increases between June and September, matching the magnitude of hikes delivered by its US counterpart in the same period. Mexican policymakers tend to follow their northern neighbor to avoid having big rate differentials trigger abrupt capital outflows from the Latin American country.

Yet Banxico’s board looks to be divided about the path ahead, with minutes of the bank’s last meeting showing two unnamed members diverging over the pace of future interest rate hikes, its stance compared to the US Federal Reserve and when the cycle should end.

During the podcast, Esquivel also said Mexico inflation seems to have peaked in the second half of August, while acknowledging core inflation has continued to accelerate, even if at a slower pace. While consumer prices should slow more significantly next year, the “difficult” disinflation process will be “long, slow and prolonged,” he said.

The board expressed its intention to continue rising the country’s key rate in its last statement, Esquivel said, but it should start thinking about when the hiking cycle should end, as it is already restrictive. Banxico shouldn’t take the ex-ante real interest rate beyond 5%, he said.

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Banxico, which holds its next policy meeting on Nov. 10, increased the benchmark rate to 9.25% last month. Mexico’s annual inflation rate stayed at 8.7% in September, unchanged from the previous month.

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