Banxico keeps interest rate at 11.25%, will hold for ‘extended period’

4:51 pm Thursday, June 22nd, 2023

By Brendan O’Boyle and Isabel Woodford

MEXICO CITY (Reuters) -The Bank of Mexico maintained its benchmark interest at 11.25% on Thursday for the second time, signaling it will hold the rate “for an extended period” as inflation in Latin America’s second largest economy slows but remains above the bank’s target.

   The unanimous decision by the central bank’s five-member board was in line with analysts’ forecasts and came as data shows annual inflation at its lowest in more than two years.

Banxico first paused its rate hikes in May after a nearly two-year hiking cycle that began in June 2021 and brought the interest rate up by 725 basis points to combat rising consumer prices.

A decision to hold was widely expected by analysts, who expect it may be next year before there are rate cuts, citing Banxico’s hawkish tone on inflation.

“We doubt that monetary loosening will be delivered until early 2024,” said Jason Tuvey, deputy chief emerging markets economist at Capital Economics.

Alberto Ramos at Goldman Sachs said he did not expect the rate to change “until at least the fourth quarter of 2023,” possibly the first half of 2024.

The central bank forecast that “the inflationary outlook will be complicated and uncertain throughout the entire forecast horizon, with upward risks,” only slightly moderating its inflation forecasts for late 2023.

Official data published earlier in the day showed consumer prices rose less than expected in early June, with annual headline inflation slowing to 5.18% in the first half of the month, the lowest since March 2021.

Annual core inflation, which strips out some volatile food and energy prices, was at 6.91%.

Banxico, as Mexico’s central bank is known, targets inflation at 3%, plus or minus a percentage point, and does not expect to converge to its target until the fourth quarter 2024.

“To achieve an orderly and sustained convergence of headline inflation to the 3% target, (the board) considers that it will be necessary to maintain the reference rate at its current level for an extended period,” Banxico said in a statement announcing its rate decision.

(Reporting by Brendan O’Boyle and Isabel Woodford; Editing by Anthony Esposito, Alistair Bell and Diane Craft)