Banxico debates whether to ‘decouple’ from US Fed

Bloomberg

Mexico’s central bank (Banxico) board is debating how closely to follow US interest rate rises, as members grapple with slowing growth and the fastest inflation in two decades.
One of the five board members argued that Mexico’s interest rate increase had to match that of the US Federal Reserve to preserve the spread between rates in the two countries, which keeps the peso from weakening.
Another member said that Mexican monetary policy decisions should be focused more on the domestic economy, and suggested “decoupling” from the Federal Reserve would be possible “relatively soon,” according to the minutes.
The bank raised its key interest rate three quarters of a percentage point to 8.5% this month, to try to curb soaring consumer prices. The Federal Reserve also raised its key rate three quarters of a percentage point at its most recent meeting, with 2.5% as the new upper bound.
Mexican policy makers keep a close eye on the US rate, since when the differential narrows it can trigger destabilising outflows of capital.
Deputy Governor Jonathan Heath said in an interview with Bloomberg News after the decision that he expected the bank to adjust monetary policy in line with its US counterpart through December. Annual inflation in the first half of August was 8.6%, its fastest pace since 2000.
Board members highlighted that core inflation is also on an upward trend.
Mexico’s central bank has been battling soaring prices caused by supply-chain problems and international conflicts. The bank has raised borrowing costs 4.5 percentage points in ten straight hikes since June 2021, threatening to further depress the country’s already-slow growth this year.
The economy expanded 2% in the second quarter, according to the gross domestic product published Thursday, which was slightly below expectations. Central bankers noted in the minutes that the latest decision would have a restrictive effect on economic growth.