Mexico, Peru to Extend Biggest-Ever Rate Rises: Decision Guide

Mexico, Peru to Extend Biggest-Ever Rate Rises: Decision Guide

(Bloomberg) — Mexico and Peru are forecast to extend their biggest-ever series of interest rate rises on Thursday as they struggle to contain a rebound in price gains.

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In Mexico, the central bank’s inflation goals have been hampered by soaring food costs, while Peru’s policymakers are trying to keep the economy stable amid the mass unrest which has paralyzed swathes of the Andean nation for two months.

Both central banks are expected to raise interest rates by a quarter percentage point. Although they are seen as nearing the end of a phase of monetary tightening which began in mid-2021, the persistence of inflationary pressure means they haven’t yet been able to follow Brazil and Chile and call a halt to rate increases.

Mexico: Matching the Fed

Mexico’s central bank, known as Banxico, will match the US Federal Reserve for a seventh straight decision, according to all 24 analysts surveyed by Bloomberg, who anticipate a quarter-point hike to take the key rate to 10.75%.

Such move “is practically a done deal,” said Janneth Quiroz Zamora, vice president of economic research at Monex Casa de Bolsa. “Banxico has stayed in tandem with them since the Fed started its tightening cycle.”

The Fed’s decision to slow its tightening to a quarter percentage point last week means analysts now expect Mexico to follow suit. The country often tries to maintain an interest rate differential over its northern neighbor to prevent destabilizing outflows of capital.

Economists will be watching for guidance on whether the Mexico could stop following the Fed over its next meetings, after Fed Chair Jerome Powell said he expected “a couple” more hikes in the US.

Mexico’s annual inflation accelerated to 7.91% in January, matching the median forecast of analysts surveyed by Bloomberg, the country’s statistics institute said Thursday prior to the rate announcement.

Banxico Deputy Governor Jonathan Heath told Bloomberg News last month that he “intuitively” saw the cycle ending between 10.75% and 11.5%.

“I don’t see it above 11.5%, actually not even much higher than 11%, but that will depend on the data,” he said, noting that he doesn’t speak for the other board members.

Heath said last week that food prices represent the biggest inflation risk.

What Bloomberg Economics Says

We expect Mexico’s central bank to increase its benchmark rate by 25 basis points to 10.75% at Thursday’s meeting, with forward guidance indicating there are no plans for more hikes, but that future moves will depend on new information.

— Felipe Hernandez, Latin America economist

— Click here for the full report

Economists are split on whether a hike today would bring the cycle to an end. Barclays Plc’s chief Latin America economist Gabriel Casillas assigned a 70% chance to today’s decision being the last increase, while Alonso Cervera of Credit Suisse Group AG thinks the bank will boost the rate to 11% at its next meeting.

Read More: Banxico Should Keep Its Peak Rate for Six Months, Heath Says

Peru: 19th Straight Hike

Peru is also expected to raise its policy rate by a quarter point to 8% in a 19th straight increase, according to 10 out of 11 analysts surveyed by Bloomberg. One economist expects the central bank leave the rate unchanged at 7.75%.

The bank’s task is being complicated by the nation’s worst social unrest in decades, which has both boosted inflation and hurt growth. Anti-government protesters have blocked highways across swathes of the country in a bid to oust President Dina Boluarte, who took office on Dec. 7 after her predecessor Pedro Castillo was impeached.

Read More: Peru’s Violent Chaos Has Cost Farms $300 Million in Lost Exports

The protests, mainly in the south, have stoked inflation by impeding distribution of basic goods, but also threaten to hurt growth by disrupting the mining, agriculture and tourism sectors.

Annual inflation accelerated to 8.66% in Lima last month, with even bigger increases in the regions most affected by civil unrest.

“Inflation is high and continues to rise, and risks are biased to the upside and have increased, said Felipe Hernandez from Bloomberg Economics. “That supports our expectation for another hike and the potential for more.”

Read More: Peru’s Congress Fails Yet Again to Agree on New Elections

(Updates with Mexico’s inflation figures released Thursday in eighth paragraph.)

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