The tone used by the Bank of Mexico on Thursday to announce the third increase in the interest rate in this year left open the door for a new increase in December, given that the balance of risks for inflation it has deteriorated and shows an important upward bias , financial analysts said.
The central bank left the door open for an additional increase in the reference rate at the meeting on December 20, probably another quarter of a percentage point. By then, the economic package for 2019 presented by the new public administration will be evaluated, as well as the minimum wage policy , said Santander México’s analysis area.
In the penultimate monetary policy meeting of the year, held last Thursday, the Bank of Mexico decided to raise the benchmark interest rate from 7.75 to 8 percent, the variation of which determines the cost to which companies and families are financed. With this measure, the central bank seeks to contain inflationary pressures, starting from making financing more expensive and thus inhibiting investment or consumption decisions.
The Bank of Mexico supported the decision to raise the rate in a deterioration of the conditions for lower inflation. The central bank mentioned that since the previous monetary policy decision, on October 4, the peso recorded an important depreciation that responded to external factors -the rise in rates in the United States and international financial volatility-, but also to internal ones.
Regarding the latter, the governing board of the Bank of Mexico stressed that the price of the peso was affected by the announcement of the intention to cancel the project in Texcoco of the new international airport in Mexico, as well as by the markets’ concern about the policies of the new administration and some legislative initiatives, which led several rating agencies to change the perspective of the country’s sovereign debt from stable to negative .
There will be no change: Banorte
The way in which the Bank of Mexico communicated the decision, last Thursday, to raise the benchmark interest rate reflects concern about risks to inflation and their expectations, both for internal and external factors, said Banorte’s analysis area.
Although we recognize risks of additional increases, we maintain our expectation that the reference rate will remain unchanged for the rest of the year and during the first half of 2019 , he said.
Banorte’s forecast is based on the next government present a responsible economic package for 2019 – the date to deliver it to Congress is December 15.
In Banorte’s opinion, the new administration will continue with the effort to reduce the amount of the public debt as a proportion of the gross domestic product (GDP), as well as to achieve a primary surplus (income minus expenditure before the payment of interest on the debt). between 0.5 and 0.8 percent of GDP.
In this sense, the publication will confirm to investors the commitment to healthy public finances and the strategy of reducing public debt as a percentage of GDP. We believe that volatility in the markets could be reduced after this event , he added.
For 2019 Banorte expects the benchmark interest rate to remain at 8 percent at least during the first half, although, he mentioned that the balance of risks for higher rises has increased.
“Despite this, we believe that the governing board of the central bank is unwilling to continue increasing the rate in the face of the probable moderation of economic growth in 2019, as the historical behavior of GDP suggests the first year of a new administration, and that core inflation -which does not include agricultural and fuel prices- will continue its downward trend “.