The Bank of Mexico, at its headquarters in Mexico City.Graciela López / CUARTOSCURO
The Bank of Mexico has decided to cut the interest rate by a quarter of a point and leave it at 4% in a unanimous decision of its Governing Board.
This is the lowest level at which this rate has been placed since the beginning of 2016. In the last two years, the central bank has been reducing it from 8.25%.
However, in October the institution decided to halt these declines for a few months to see how inflation evolved, which was then at its highest point in 2020. The decision to lift the brake, taken this Thursday, comes just after the report of the National Institute of Geography and Statistics (Inegi) that places inflation in the country at 3.54%.
The central bank tries to handle with millimeter precision the lever that allows the country's economic growth without it triggering ghosts such as inflation.
To achieve this, it has the interest rate as its main weapon.
The theory suggests that a high rate can contain inflation, since it becomes an incentive in favor of saving and against debt.
On the contrary, a low interest rate can allow inflation to rise, while stimulating growth.
It is a complex balance.
To make today's decision, the Bank of Mexico alludes that annual headline inflation fell from 4.09% in October, its highest level in 2020, to 3.54% in January 2021. This last figure is slightly above than what analysts had projected for the new year, but it remains within the range of variability estimated by the central bank, one point above or below 3%, which is the true goal of the institution.
Thus, this drop compared to October gives the bank a small margin to continue tightening the interest rate.
Even so, the Bank of Mexico statement acknowledges that expectations have "slightly" increased that prices will continue to rise further this year.
In January, costs already increased by 0.86% compared to December, mainly due to the rise in energy, whose price increased by 5.23% at the beginning of the year.
The pandemic hit Mexico hard, whose GDP plunged 8.5% in 2020, the biggest drop since the Great Depression.
After almost a decade followed of stable growth - with the 2019 slump, when the economy decreased by 0.1% - the COVID-19 crisis has put the Mexican economy on the ropes.
The 3.1% rebound in Q4 2020 was a breath of encouragement.
This is also the view of the Bank of Mexico: “Economic activity in Mexico improved during the fourth quarter at a slightly higher rate than expected, although it remains below pre-pandemic levels, in an uncertain environment and with risks to the come down.
Wide slack conditions are anticipated throughout the horizon in which monetary policy operates ”.
The main risks identified by the central bank are directly linked to the health contingency: the increase in infections and delays in the production and distribution of vaccines.
Mexico has gone a month without receiving covid-19 vaccines after the unforeseen supply of Pfizer right at the height of the pandemic: in January more than 30,000 people died from the virus.
While this still uncertain environment continues, Banco de México expresses its willingness to "promote an orderly adjustment that allows a change in prices without affecting inflation expectations."
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