Market would have overreached to a higher rate in Mexico: Esquivel

(Bloomberg) – Markets may have overreacted by discounting several more interest rate hikes after Mexico’s central bank surprisingly raised borrowing costs on Thursday, Deputy Governor Gerardo Esquivel said.

The bank raised the benchmark rate for the first time since late 2018, decreeing a quarter-point hike to 4.25% in a split decision. On Friday morning, markets expected the rate to rise another 131 basis points.

“I think it may be an overreaction to this particular event,” Esquivel said in an interview Friday with Bloomberg News, commenting on the market response. “One thing the release was careful about is precisely not suggesting that it was necessarily the start of a bull cycle.”

The peso erased its previous highs and was down 0.1% to 19.8741 at 1:24 pm in Mexico Mexico City.

If inflation “is more or less in line with expectations, I don’t think additional hikes would necessarily have to be anticipated,” he said, explaining that the board now projects higher inflation than expected in its last quarterly report.

The bank expects inflation to gradually decelerate in the third quarter, before accelerating again at year-end, he said. The annual price increase could remain above 5% for much of the year, but that would still be within the central bank’s expectations, he said. Inflation has continued to surprise the bank and economists this year, increasing to more than double the 3% target in April and not declining significantly since.

Further increases in interest rates run the risk of hurting Mexico’s incipient economic recovery, he added.

“Undoubtedly, a rate increase always has that implication that can have a negative effect,” he said. “Perhaps just a quarter point increase is not that drastic, but additional increases may have this implication.”

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While the increase was aimed at curbing inflation expectations, Esquivel said he believes most inflationary shocks have passed.

“Very important shocks have already occurred in raw materials that, in some way, have begun to be contained,” he said. “There has been a significant increase in energy prices that has also begun to be contained.”

Original Note: Market May Be Overreacting on Mexico Hike, Policy Maker Says (1)

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