UPDATE 3-Hawkish Bank of Mexico hikes rates to 7%, flags tougher steps to tame inflation

Adds context and comments from Bank of Mexico and economist

By Anthony Esposito

MEXICO CITY, May 12 (Reuters) – The Bank of Mexico on Thursday raised its benchmark interest rate by 50 basis points to 7.0%, as expected, underscoring an increasingly complex inflation outlook and saying it may take “more forceful measures” to tame price pressures.

Four of the bank’s five board members voted for the half a percentage point increase, while the fifth, Irene Espinosa, opted for a 75 basis point hike to 7.25%.

“Given the growing complexity in the environment for inflation and its expectations, taking more forceful measures to attain the inflation target may be considered,” the bank said in its post-meeting statement.

Banxico, as Mexico’s central bank is known, has now increased its benchmark rate by 300 bps over the last eight monetary policy meetings as it struggles to get inflation to its target of 3%, plus or minus one percentage point.

Goldman Sachs economist Alberto Ramos called Banxico’s statement “hawkish.”

“Not only was there a dissenting vote for a bolder 75 basis points (increase) but the monetary policy committee stated that at the next meeting it will evaluate adapting more forceful measures to attain its target,” said Ramos.

He expects Banxico to hike rates to 7.50% at its June 23 meeting and to drive the key rate to 8.50% by the end of 2022.

Banxico’s latest decision comes as inflation in Mexico hit 7.68% in April, the highest since January 2001, and after the U.S. Federal Reserve raised interest rates half a percentage point, the biggest jump in 22 years. nL2N2X10V1nL2N2WW1W8

Banxico forecast inflation would converge to the 3% target in the first quarter of 2024.

On top of price shocks stemming from the coronavirus pandemic, there are also pressures linked to geopolitical conflict – a nod to Russia’s war in Ukraine – and strict lockdown measures recently imposed by China, the bank said.

Higher prices may also be feeding into wage-setting.

U.S. automaker General Motors agreed to raise wages 8.5% in a new collective contract at a plant in central Mexico, the local trade union said on Thursday. nL2N2X42IJ

(Reporting by Anthony Esposito and Dave Graham; Editing by Andrea Ricci and Rosalba O’Brien)

((anthony.esposito@tr.com; +5255 5282 7140))