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Mexico central bank poised to raise rates further as it battles inflation

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The Bank of Mexico is expected to raise interest rates for the fifth consecutive time on Thursday as it tries to smooth over a rocky leadership transition while the country faces its highest inflation in two decades.

Analysts believe that the five-member board will increase the key rate by 25 basis points to 5.25 per cent, although some see the possibility for a 50-basis point move as it balances soaring price rises, fragile growth and expectations that the US Federal Reserve will begin raising rates next year.

The bank simultaneously faces an internal challenge in smoothing over a turbulent transition to new leadership. In November, Andrés Manuel López Obrador, Mexico’s president, shook markets when he withdrew his nominee for central bank governor and replaced him with a little-known public sector economist.

Victoria Rodríguez Ceja has since been officially confirmed as Banxico’s next governor and will be the first woman to hold the role, although the opposition has questioned her monetary policy experience and her independence from the president.

Rodríguez Ceja, who will take over from Alejandro Díaz de León on January 1, has vowed to fight inflation, not touch international reserves and maintain the bank’s autonomy.

Like many countries, Mexico is trying to tame soaring prices. Annual inflation hit 7.37 per cent in November, its highest level in 20 years. From Brazil to Poland, central banks around the world are tightening monetary policy in an effort to contain inflation.

JPMorgan analysts wrote that Thursday’s rate decision will be a tough one given the persistent upward surprises in inflation, expectations that the Fed will raise rates next year and the fact that Banxico started this tightening cycle from a higher rate than other emerging markets.

“Díaz de León’s swan song will be his toughest,” they wrote.

The bank is also contending with a fragile recovery in Mexico’s economy, which saw a sudden contraction in the third quarter. More recent data suggest a rebound, but analysts have revised down their GDP growth projections for 2021 to 5.7 per cent, according to a monthly Banxico survey.

“Growth data have been disappointing, and the 4Q rebound does not seem to be strong,” analysts at Morgan Stanley wrote.

Uncertainty around the changes at Banxico has also had an impact. Rodríguez Ceja’s nomination in November hit the peso, which has rebounded from its lows but remains down 1.9 per cent against the US dollar compared to the Friday before the news. It is currently trading at 21.2 to the dollar.

Foreign investors pulled nearly $1.3bn from government securities in November, while foreign investments in Mexican equities also show outflows of nearly $4.8bn to November, according to analysts at BBVA.

“We would expect foreign inflows to remain stagnated, as uncertainty regarding the current tightening cycle will continue due to the probable noise resulting from the new composition of Banxico’s board,” the analysts wrote.

Additional reporting by Eric Platt in New York



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