Mexico raises its interest rate to 7.75%, the highest rise in 14 years

Facade of the Bank of Mexico, in Mexico City. Graciela López (CUARTOSCURO)

In its ninth consecutive attempt to stabilize inflation, the Bank of Mexico voted this Thursday to increase its reference interest rate by 75 basis points, reaching 7.75%, the highest level since October 2019. This is the largest rise since Mexico began the current monetary policy.

The Government Board, headed by Governor Victoria Rodríguez Ceja, warned in a statement that the rate will continue to be raised to face the greatest global risks, including geopolitical tensions and adjustments to economic, monetary and financial conditions. .

Banxico's decision, as the central bank is known, comes a week after the Federal Reserve, the monetary authority in the United States, announced its hike of 75 basis points to deal with inflation caused by ruptures in supply chains. globalization and the war in Ukraine.

Mexico's latest fortnightly inflation figure was released on Thursday, reaching 7.88% in June, well above the central bank's target range of 2-4%.

The bank will monitor inflationary pressures, says the statement, "with the aim of determining a consistent reference rate at all times, both with the orderly and sustained convergence of general inflation to the 3% target in the term in which it operates monetary policy as with an adequate adjustment of the economy and financial markets”.

And he adds: "In the following decisions, the Governing Board intends to continue increasing the reference rate and will assess acting with the same forcefulness if required."

This is the ninth consecutive increase in the rate in Mexico, which stood at 4% in March 2021. In the 14 years that the Bank of Mexico has used the interbank interest rate as monetary policy, no rise as big as this Thursday.

Before the rate, which works as a reference in the financial system, the bank used a system of accumulated balances known as "short" to influence prices.

The bank sees a deterioration in inflation expectations, according to the statement, and does not expect it to reach the target range until mid-2023. Inflation will touch 8.1% in the third quarter of the year and close 2022 at 7.5 %, according to the statement.

As of Thursday's decision, analysts expect an equal or higher rise in the next decision on August 11.

“The risks of higher inflation continue to be external,” said Carlos Morales, an analyst at credit risk agency Fitch Ratings, who expects the rate to be 8.5% by the end of 2022. “Further tightening of monetary policy of the US, a prolonged duration of the invasion of Ukraine by Russia and the interruptions in the supply chain due to the confinement measures of China, will lead to further rate hikes by the Bank of Mexico in the short term. , he added, in a statement.

Since 2008, 127 monetary policy decisions have been made.

During this period, the reference rate has been increased 27 times;

16 times at 25 basis points, 10 times at 50 basis points and now, for the first time, at 75 basis points.

— Jonathan Heath (@JonathanHeath54) June 23, 2022

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