Mexico and Peru to Extend Record Key Rate Hikes: Decision Guide
(Bloomberg) -- Mexico and Peru are forecast to extend their steepest-ever series of interest rate increases Thursday even after some incipient signals that inflation in the countries has peaked.
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Mexico’s central bank will lift its key rate to 10% with a fourth-straight increase of three-quarters of a percentage point, according to all 26 economists surveyed by Bloomberg.
Peru’s policymakers, meanwhile, are set to boost their benchmark rate by a quarter point to 7.25%, according to 7 of 12 economists. The other five expect the bank to leave the rate unchanged at 7%, halting a cycle of 15 consecutive increases.
Inflation has begun to cool in both countries, as well as in Brazil and Chile, as supply shortages caused by the pandemic, as well as Russia’s invasion of Ukraine, have started to ease. But policymakers across the region are still applying the brakes to ensure that inflation expectations drop decisively toward their targets.
Mexico
Current rate: 9.25%
Time of decision: 2 p.m. New York time
Mexico’s central bank is expected to match the US Federal Reserve’s rate hike again, even after inflation slowed to 8.4% in October from 8.7% in September.
Mexico often follows US rate increases to prevent a narrowing interest rate differential from triggering destabilizing outflows of capital.
Analysts will be scrutinizing the five-member board’s statement for signs it may soon start to chart its own course. Mexico began raising rates nine months before its northern neighbor did.
The performance of the peso, which hit its strongest level this week since the start of the pandemic, gives the bank some margin for error, Gabriel Lozano, Mexico’s chief economist at JPMorgan Chase & Co., said.
“Right now is the moment in which they can start to decouple,” Lozano said. “The way in which the peso has been behaving should give them some room to act and mention and communicate that you cannot obsess with thinking that you need a 600-basis-point differential with the Fed.”
Read more: Mexican Inflation Slows More Than Forecast
Although price gains slowed in October, core inflation, which excludes volatile goods such as fuel, is still accelerating, meaning the board will be wary of easing policy prematurely.
Agreements between the Mexican government and supermarket chains including Wal-Mart de Mexico SAB and Grupo Comercial Chedraui SA to tame prices are helping ease inflation, President Andres Manuel Lopez Obrador told reporters at his daily press briefing on Wednesday.
Read more: Mexico Spends $28 Billion in Subsidies to Tame Inflation
Mexico targets annual inflation of 3%, plus or minus 1 percentage point.
Peru
Current rate: 7%
Time of decision: 6 p.m.
Peru is forecast to raise interest rates for a 16th straight month to the highest level since 2001, as policymakers try to get inflation back under control and also prevent higher interest rates in the US from triggering a selloff in the sol.
The central bank is seen increasing its key rate by a quarter percentage point, to 7.25%. Although the bank has been tightening policy more gradually since its September meeting, it will likely keep the door open for additional increases, according to Felipe Hernandez, Latin American economist at Bloomberg Economics.
What Bloomberg Economics Says
“We expect Peru’s central bank to increase its benchmark interest rate by 25 basis points to 7.25% on Thursday and keep the door open for additional hikes. High inflation and inflation expectations as well as tightening external financial conditions after the Federal Reserve’s November meeting support the outlook. Weak growth and already tight monetary conditions should limit the appetite for a bigger adjustment.”
-- Felipe Hernandez, Latin American economist
Click here for the full report.
Central bank chief Julio Velarde said last week that the bank is looking toward the end of its interest rate increases, but that it will keep its options open.
Annual inflation slowed to 8.3% last month, which is still more than four times the 2% mid-point of the inflation target.
--With assistance from Maya Averbuch.
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