By Brendan O’Boyle and Isabel Woodford
MEXICO CITY (Reuters) -Mexico’s central bank on Wednesday signaled it would hold the country’s benchmark interest rate at its current all-time high for an extended period of time in order to bring inflation down to its target range.
“To achieve orderly and sustained convergence of headline inflation to the 3% target, the bank’s governing board considers that it will be necessary to maintain the benchmark rate at its current level for a prolonged period,” the Bank of Mexico said in its quarterly economic report.
The central bank’s governing board unanimously held the benchmark interest rate steady at 11.25% on May 18, breaking a nearly two-year rate-hike cycle in which it raised the rate by 725 basis points to combat rising consumer prices.
Annual inflation peaked in August and September at a more than two-decade high of 8.70%, slowing to a 20-month low of 6.0% in the first half of May, according to official data published last week.
Core inflation – considered a better gauge of price trends because it excludes some highly volatile items – hit its lowest level in a year, but remains “a risk,” according to the bank.
During a presentation of the quarterly report, members of the central bank’s board of governors hinted that it may be premature to lower the interest rate in the short term, despite inflation moving in line with expectations.
Deputy governor Irene Espinosa said that it was “important” to keep the rate restrictive, while deputy governor Jonathan Heath said that the real-ex-ante interest rate should stay in the 6-7% range for “the time that is necessary.”
Mexico’s so-called real-ex-ante policy rate, defined as the difference between the nominal interest rate and expected inflation, is tracking at around 6.35%, Goldman Sachs’ Alberto Ramos said in a note on Wednesday.
Goldman expects Mexico to keep the benchmark rate unchanged until “at least” the fourth quarter, Ramos said.
Bank Governor Victoria Rodriguez said the bank has yet to see the interest rate have a “worrying impact” on companies.
Banxico, as Mexico’s central bank is known, currently forecasts inflation will reach its 3% target by the last quarter of 2024.
The bank does, however, appear to be more bullish on growth, raising its economic growth forecast for 2023 to 2.3% on Wednesday, an upward revision from 1.6% in its March report.
The Mexican peso has been one of the best performers among major global currencies over the course of the year, reaching a seven-year high this month amid a steady inflow of remittances, strong export growth and a private investment boost.
(Reporting by Brendan O’Boyle and Isabel Woodford; Editing by Anthony Esposito and Deepa Babington)
