Economy

Mexico's and Colombia's central banks hike rates on inflation concerns

Both decisions echo regional counterparts and come ahead of an expected withdrawal of monetary stimulus by the U.S. Federal Reserve

General view of Colombia's central bank in Bogota, Colombia October 9, 2019. Photo: REUTERS/Luisa Gonzalez/File Photo
  • Mexican consumer prices during the first half of September rose 0.42% to reach annual inflation of 5.87%, already edging above the 5.59% clocked for August, official data showed last week.;
  • In Colombia, the rate increase is the first one since July 2016 and the first movement in a year. The board drastically cut borrowing costs last year before holding at 1.75% to boost economic recovery amid the COVID-19 pandemic.

Mexico‘s and Colombia‘s central banks raised both countries’ benchmark interest rates by 25 basis points on Thursday, to 4.75% and 2%, respectively. Both decisions echo regional counterparts and come ahead of an expected withdrawal of monetary stimulus by the U.S. Federal Reserve.

Last week, the Brazilian central bank also decided to raise the country’s benchmark interest rate. The so-called Selic has been rising since March this year; since then, it went from 2% to 6.25%. It was a jump of 4.25 points in five consecutive meetings, held over seven months.

“Although the shocks that have increased inflation are expected to be transitory, due to their variety, magnitude, and the extended horizon over which they have affected it, they may pose risks to the price formation process and to inflation expectations,” Banxico said in its monetary policy statement.

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In order to avoid those risks, Banxico said it deemed it necessary to hike the key rate. Mexican consumer prices during the first half of September rose 0.42% to reach annual inflation of 5.87%, already edging above the 5.59% clocked for August, official data showed last week.

That is far above Banxico’s target rate of 3% plus or minus one percentage point. Banxico said that annual headline and core inflation projections are expected to decrease, particularly for one year and beyond, and to converge to its 3% target by the end of the forecast horizon.

In Colombia, while raising its benchmark interest rate, the Central Bank also increased its GDP (from 7.5% to 8.6%) and inflation (from 4.1% to 4.5%) predictions for the year.

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The rate increase is the first one since July 2016 and the first movement in a year. The board drastically cut borrowing costs last year before holding at 1.75% to boost economic recovery amid the COVID-19 pandemic.

A notable increase in consumer prices over recent months was the principal motivator for raising the rate, after 12-month inflation hit 4.44% in August, well above the target range of 2% to 4%.

“We are merely responding to what is required by the circumstances that we see today, which oblige us to reduce the magnitude of monetary stimulus we were giving during the hardest phase of the pandemic,” board chief Leonardo Villar said.

“Such high economic growth and inflation figures that could begin to affect inflation in the future if we don’t make adjustments makes it necessary to start a cycle of reduction in monetary stimulus and of increases in interest rates,” Villar said.

Forecasts remain uncertain because of the pandemic, the board added in a statement.

“(The board) recognizes the risks that the deviation of inflation expectations from the target will become a persistent phenomenon,” Villar said.

Analysts predict that the board will continue with rate hikes for the rest of this year, taking borrowing costs to 2.50% in December.

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