Sluggish economy tests Mexican central bank’s rate hike cycle

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MEXICO CITY, Oct 29 (Reuters) – Mexico’s first economic contraction since the start of the recovery from the coronavirus pandemic poses a challenge to the central bank’s monetary policy tightening cycle, but stubbornly high inflation looks likely to take the lead, analysts said Friday.

Mexico’s economy shrank 0.2% here in the July-September period from the previous quarter after a resurgence of the coronavirus pandemic led to lower service sector activity and disrupted markets. global supply chains, according to preliminary data.

The growth setback provides ammunition to keep monetary policy looser on the board of the Bank of Mexico (Banxico), which has been divided as it carried out rate hikes of 25 basis points to each of its last three meetings.

However, headline inflation is at 6.1%, double the bank’s 3% target rate, and analysts said on Friday that price stability concerns would likely prove decisive in keeping rates low. up as growth is expected to resume.

The annual inflation forecast by Grupo Financiero Base would end 2021 at 6.6% and remain above 4% throughout 2022.

“This makes another 25 basis point interest rate hike by the Bank of Mexico very likely and the possibility of two 25 basis point increases before the end of the year is not ruled out,” he said. Base Economist Gabriela Siller.

Banxico Deputy Governor Jonathan Heath told Reuters earlier this month that the bank’s tightening cycle was not yet over and that one or two more increases were likely due to concerns over the ‘inflation.

However, he stressed that any monetary policy move would depend on incoming data.

Nikhil Sanghani, an analyst at Capital Economics, said the latest growth figures showed that “weakness in the economy will likely ensure that Banxico’s tightening cycle remains gradual, and we expect a further 25 basis point rate hike. , at 5.00%, at its meeting in mid-November.

Sanghani expects growth of 6.0% in 2021 and 2.8% in 2022, slightly below the consensus of private analysts polled in the latest monthly survey from the Bank of Mexico.

Mexico’s central bank is due to meet for its next monetary policy-setting meeting on Nov. 11. (Reporting by Anthony Esposito and Dave Graham Editing by Marguerita Choy)

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