Banco de México raises interest rate by 50 points in the face of relentless inflation

Mexico City, 24 Mar Inflation is not a respite in a Mexico that marked a rise in consumer prices of 7.29% in the first half of March, prompting Banco de México (Banxico) to raise the interbank interest rate by 50 basis points to 6.50%. “The monetary policy stance is in line with the trajectory required for inflation to converge to its 3% target within the forecast horizon,” argued the Governing Board of the Banco de México, which unanimously approved the decision of its five members. Banxico's decision represented the seventh consecutive increase in the rate. The last time it rose was on February 10, in the debut of the new central bank governor, Victoria Rodríguez Ceja. INFLATION DOES NOT STOP The Mexican inflation rate rose in the first half of March to 7.29% after a price increase in this period of 0.48% compared to the previous fortnight, driven by energy and food, the National Institute of Statistics and Geography (Inegi) reported on Thursday. The annual figure for the first half of March also represents a slight increase compared to February, when inflation was 7.28% year-on-year. However, remaining at the highest inflation levels in two decades in Mexico led the issuing body to make this decision. The Governing Board “assessed the magnitude and diversity of shocks that have affected inflation and their determinants”, as well as the risk of contamination of medium- and long-term expectations and price formation. A situation that now faces “greater challenges” in the face of “heightened uncertainty” due to the “geopolitical conflict” in Ukraine, he added. In this context, the Banco de México also estimated that it would not be until the first quarter of 2024 that the issuer's inflation target of 3% could be reached. The deputy director of Economic Analysis at Monex Grupo Financiero, Janneth Quiroz, explained to Efe that “expectations for general inflation were revised considerably upwards for next year. Thus, from the second quarter to the fourth of this year, projections increased by 150 basis points (by 1.5 per cent) and in the first quarter of 2023 by 110 (by 1.1 per cent).” Monex estimates inflation of 5.2% for 2022 and 4% for 2023 in Mexico. Inflation pressure, and the war in Ukraine, comes at a complex time for the world and for a Mexico that had a historic contraction of 8.2% in gross domestic product (GDP) in 2020 and that only rebounded to 4.8% in 2021, down from the 6% expected by the government. THE CONTROVERSY OF LÓPEZ OBRADOR In an unprecedented event, the President of Mexico, Andrés Manuel López Obrador, had already announced on Thursday that the Bank of Mexico had made the decision to raise the interest rate by 50 basis points. “Yesterday (Wednesday) the Bank of Mexico increased the interest rate by 0.50 points. We are going to have the interest rate at 6.5% because when the interest rate rises there is less investment and inflation is supposed to fall. It is a control mechanism,” the president said at the press conference from the National Palace. The controversy reached the 85th Banking Convention, which started this Thursday in Acapulco. Asked about the issue, the leader of the Mexican Banking Association (ABM), Daniel Becker, expressed his confidence in the new governor of Banxico, Victoria Rodríguez Ceja. “He has clearly indicated and expressed to us the autonomy given to him by both the president, the federal government, and his support of the Governing Board, and we see no risk of losing any kind of autonomy with the new governor,” Becker said in an attempt to remove iron from the matter. However, analysts, social networks and civil organizations such as Mexico Evalua echoed this unusual announcement by López Obrador. “The early disclosure of the Bank of Mexico's monetary policy decision violates autonomy and hurts trust in the institution,” said Mexico Evalua. CHIEF mqb/esc/dmt (video)