BANXICO KEY POINTS:
- Banxico raises overnight interest rate by 25 basis points to 4.50%, raising borrowing costs for the second time in 2021
- The central bank says that inflation will reach the 3% target in the first quarter of 2023, later than in the third quarter of 2022 set at the previous meeting
- Worrying inflation profile leaves the door open to monetary constraints in the coming months, a constructive scenario for the Mexican peso
In accordance with consensus expectations, Banxico decided to raise the overnight interest rate by 25 basis points to 4.50% a split decision at the end of the August board meeting, after a trip of the same size in June‘s conclave.
Recent adjustments to tighten monetary policy have been part of austerity efforts enlargement inflationary pressures in the economy and ensure that expectations do not become unchecked due to the second round of price shocks. It will be recalled that the main consumer price index has remained above the annual target of 3% for several months, registering 5.81% in July, which is a very inconvenient indicator. for policy makers.
The bank said in a statement that the recovery was continuing, but warned that the increase in COVID-19 cases posed a threat to the economy. Meanwhile, the institution said about inflation that the risk balance continues to be skewed and this The CPI approach to the 3% target will be postponed to the first quarter of 2023 in contrast to the third quarter of 2022, which was the official estimate in June.
The table below summarizes the new forecasts published by the institution
The Banxico decision did not trigger an upward reaction in the Mexican peso, as the financial institution characterized the price shocks as temporary (USD / MXN rose higher after the decision, as shown in the diagram below). However, the fact that inflation will not reach the target until 2023 clearly excludes it the door should open for further tightening consumer price data are not developing satisfactorily. Additional interest rate rises are likely to support the Mexican peso US dollar in the medium term, especially if the central bank decides to postpone the announcement of QE unable to recover meaningfully.
USD / MXN 3 MINUTE TABLE
EDUCATIONAL INSTRUMENTS FOR TRADE
– Written by DailyFX market strategist Diego Colman