The Bank of Mexico raises the interest rate to 7% to contain runaway inflation

Given the escalation of pressures, the blockage in the supply chains and the geopolitical tensions at a global level, the Bank of Mexico has decided this Thursday to increase the reference interest rate by 50 basic points to reach 7%.

The autonomous body has voted for the eighth consecutive increase in the face of worsening inflation forecasts.

"Global inflation continued to rise, pressured by bottlenecks, recovery in demand and high food and energy prices," says the statement published by the bank.

The decision did not come as a surprise, as it is in line with the market consensus, which already anticipated an increase of this magnitude given the environment.

The Governor of the Bank of Mexico, Victoria Rodríguez Ceja and the Deputy Governors Galia Borja Gómez, Gerardo Esquivel Hernández and Jonathan Heath voted in favor of the decision, while the Deputy Governor Irene Espinosa Cantellano voted in favor of increasing it by 75 basis points.

The decision will take effect from this Friday.

The interbank interest rate is used as a reference in financial transactions, from mortgages to loans and credit cards.

In April, annual inflation reached 7.68%, its highest level in two decades, according to official figures.

"To the inflationary shocks derived from the health emergency are added the pressures from the geopolitical conflict and the strict confinement measures recently imposed in China," the institution states.

The Central Bank explains that in the face of higher-than-anticipated inflationary pressures, the forecasts for headline and core inflation were revised upwards until the second and third quarters of 2023, respectively, although it is still expected that the convergence to the 3% target will be reach in the first quarter of 2024.

An important factor for Mexico is that the Federal Reserve in the United States raised its interest rate by 50 basis points, the largest increase in 22 years.

Which left them between 0.75% and 1% the US interest rate in the face of the US price escalation.

The president of the Fed, Jerome Powell, warned that successive rises will be necessary until next July.

However, one of the risks of an interest rate that is too high, according to experts, can impede economic growth in Mexico, already hit by the pandemic.

The Bank of Mexico also increased its inflation forecast for the second quarter of 2022 from 6.9% to 7.6% and for the third quarter adjusted it from 6.1% to 7%.

The institution forecasts that inflation will begin to decline in the country from the last quarter of this year and will converge to 3.1 at the beginning of 2024.

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