Home Transitory “Not Transitory”: Peso Soars After Mexican Central Bank Shocks With Unexpected Rate...

“Not Transitory”: Peso Soars After Mexican Central Bank Shocks With Unexpected Rate Hike


Hyperinflation may be transitory in the US whose clueless central bank will watch as prices surge by double digits before intervening (if then), but the southern US neighbor, the central bank has seen enough and after pulling a Fed and for month saying that inflation will decline (spoiler alert: it has not) on Thursday Mexico’s central bank became the latest to jump on the tightening bandwagon when it unexpectedly raised rates the first time since 2018 as concern mounts – in the country that can now safely say it neighbors the true banana republic – that persistently elevated inflation may threaten the rebound and crash the economy.

In a “shocking” – to Jerome Powell – move, Banco de Mexico, better known as Banxico, raised its key rate by a quarter-point to 4.25% in response to a jump in inflation that policy makers had previously described as transitory. The decision surprised all 23 economists surveyed by Bloomberg who had expected the bank to hold at 4%.

Ahead of the decision, Mexican data showed that inflation accelerated further in early June to 6.02%, also surprising analysts. Banxico, as the central bank is known, targets inflation at 3%, plus or minus 1 percentage point.

The rate hike comes after Mexico’s economy shrank by 8.2% in 2020, the most in almost a century, and the bank’s aggressive easing provided the only substantial form of economic stimulus during the crisis as the government kept an austere fiscal policy. The economy has rebounded faster than expected so far in 2021, adding to inflationary pressures, with the bank projecting 6% growth for the year according to Bloomberg.

While inflation appeared to peak at 6.1% in April Y/Y, it has barely declined since then, complicating the central bank’s task after initially lying that the inflationary spike would be momentary. A similar loss of credibility awaits the Fed which has been repeating the same lie for months even as soaring prices are destroying what’s left of America’s middle class.

Thursday’s decision is the first since President AMLO nominated Finance Minister Arturo Herrera to become Banxico governor when current leader Alejandro Diaz de Leon steps down at the end of the year. If Erdogan was president, we can safely say that today’s decision would be Diaz’s last.

In response to the surprising decision, Mexico’s peso surged as much as 2.4% to trade at a session high of 19.72 per dollar.