World's Most Hawkish Central Bank Set to Join Low Inflation CrewBy
Board says rate has reached a level consistent with CPI target
Mexico hiked rates four times as much as U.S. since late 2015
After a year and a half of the world’s most aggressive interest-rate increases, Mexico’s central bank is poised to join the low inflation crowd.
Banco de Mexico on Thursday signaled that it’s finished with hikes spurred in part by the peso’s record tumble amid rising U.S. rates and misgivings about Donald Trump. In a world of low inflation, Banxico’s 4 percentage points of tightening made previously boring Mexico easily the most active major rate-setting bank. The Federal Reserve raised rates just 1 percentage point over the same period, and developing nations including Brazil, India and Russia cut them.
The statement from Governor Agustin Carstens and his board that accompanied Thursday’s decision turned the futures market upside down. Traders who a day earlier foresaw a quarter-point increase for this week, with a chance for another later this year, eliminated bets for future hikes. They now price in a 90 percent chance for a cut by December, up from just 19 percent a day earlier. The nation’s finance minister also suggested lower rates could be in the cards.
"In our assessment, there is a significant probability that’s today’s 25 basis-point hike marked the end of the long hiking cycle," Alberto Ramos, Goldman Sachs Group Inc.’s chief Latin America economist, wrote in a research note to clients.
And why shouldn’t it? The peso has rallied 19 percent, the best performance in the world, since Trump’s inauguration on Jan. 20. While time and again Carstens has said that the central bank doesn’t target a specific level for the currency but was instead focused on mid and long-term inflation expectations, the peso’s rebound gave them breathing room by reducing pass-through concerns.
Read more: Mexico Country Primer - Bloomberg Intelligence Research
At the same time, Mexico’s five-year breakeven rate, a bond market proxy for inflation expectations, has fallen to 3.65 percent, down from 4.07 percent in mid-May and an ultimate peak of 5.05 percent the day Trump took office. The central bank targets inflation of 3 percent, give or take a percentage point. For their part, economists expect inflation to slow to 3.8 percent next year, down from 6.3 percent in early June, according to the median analyst forecast in a Citibanamex survey published this week.
In its statement Thursday, the central bank board took the long view, talking about the collective effect of 10 separate interest-rate increases since December 2015. One member of the board even voted to leave rates on hold, the first split decision since July 2015, before the current series of rate increases began. Perhaps the most telling sentence, coming second to last and perhaps serving as a coda on this monetary policy cycle, stretched to almost 100 words.
"The board considers that with the increase announced today, and taking into account the transitory nature of the shocks that have impacted the inflation figures, the information with which it currently counts, the time horizon in which the transmission channels of monetary policy fully operate, as well as forecasts for the economy, the level reached in the reference rate is congruent with the process of efficient convergence of inflation to the 3 percent objective."
For Sergio Luna, the chief economist at Citibanamex, the passage illuminated the path for future rate decisions.
"From our perspective, the first message is very clear," he said. "The increase today is the last."
— With assistance by Felipe Hernandez, Lorenzo Nalin, and Michelle Davis