Banxico Board divided: ‘inefficient’ or required hikes?

A “more aggressive tightening” of monetary policy is likely to be required. Mexico to face the complex risk scenario that looms, said a member of the country’s central bank, according to the minutes of its last meeting published on Thursday.

The majority of the five-member Board of the Bank of Mexico, known as Banxico, said it saw upward risks to inflation in the country and warned that recent shocks could further boost consumer prices and inflation expectations. A lone dissident, Lieutenant Governor Gerardo Esquivel, argued against the hikes on the grounds that a higher key rate would not resolve the factors causing inflationary pressures.

The board, which at its September 30 meeting voted 4-1 to raise borrowing costs to 4.75% from 4.5%, has been divided on the consecutive increases since June. Most members agreed that shocks pose a risk to the price formation process and inflation expectations. Additionally, one member argued that a bolder increase “would seek to avoid further strengthening of second-round effects.”

“He argued that, for the moment, no additional risks have materialized but it is very likely that a more complex scenario will be observed, which under a preventive approach would require a more aggressive adjustment”, indicate the minutes, which in most cases preserve the anonymity of the comments made by the directors.

The minutes also showed that Esquivel stuck to its earlier arguments that interest rate hikes were “ineffective” in a scenario where inflation was driven by supply shocks. He argued that rising rates could send a signal to markets that current inflation is permanent, rather than temporary.

“From the first increase to date, short-term expectations have only increased, so the objective sought has not been achieved,” Esquivel said, according to the notes.