“Increase of 75 basis points is necessary to combat inflation”

Given persistently high levels of inflation, Irene Espinosadeputy governor of Bank of Mexico (Banxico) indicated that an increase of 75 basis points in the institution’s reference rate is necessary, which would not only help achieve convergence of the inflationbut also to reinforce the credibility of the central bank, according to the minutes of the last meeting of monetary politics.

“Increasing the rate of adjustment of the monetary stance to 75 basis points is necessary to achieve convergence to the goal within the planning horizon and reinforce the credibility of the commitment of this central institute with its priority mandate of maintaining price stability” , the document reads.

At the last meeting of the Government Board it was decided, with four votes, a rise in the interest rate of 50 basis points, which reached 7 percent. While, Irene Espinosa she was the only member who voted for a 75-point increase.

Deputy Governor Espinosa highlighted that the projections for general inflation were revised upwards for the next five quarters, while long-term expectations were adjusted above 3.5%, the first time since its measurement was recorded.

“The acceleration of inflation higher than expected has meant that the adjustments in the monetary stance implemented in recent months have had a limited effect on the real interest rate, which remains below the level required to achieve convergence to the 3% target”, highlighted.

Yes ok Irene Espinosa was the only voter in favor of an increase of 75 points, in the minutes it is observed that another member of the Governing Board raised the need for an increase of more than 50 points, although in the end he did not vote for it.

In this sense, a member said that it is time to “act with determination and opportunity”, so the rate should be increased by 75 points, while another member mentioned that increasing the rate by this magnitude would send “a stronger message from the commitment to the priority objective”, but this would surprise the market, making it difficult to forecast the referral fees and distorting the interpretation.

“In addition, it could mark a new rate of adjustment, difficult to reduce in the context of high inflation, a cycle of Federal Reserve very restrictive and a monetary adjustment in Mexico that goes a long way. A higher rate could result in an excessively high terminal rate for the healthy development of the economy and financial markets“, he added.

After the minutes were released, the market took the discussion as the door for Banxico may make an adjustment of up to 75 basis points in future meetings if inflation continues unabated.

“The outlook for inflation has become more difficult, and we expect it to take longer than expected to ease. This, and the expectation that the United States Federal Reserve will assume an aggressive monetary tightening, further reduces Banxico’s room for manoeuvre”, explained Grupo Financiero Ve por Más (Bx+).

For its part, Monex considered that the minutes had a hawkish tone, and it was observed that several of the members are willing to at least consider the advisability of increasing the reference rate by more than 50 basis points.

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