The Bank of Mexico (Banxico) made history: for the first time in its more than 25 years of autonomy, the Central Bank applied an increase of 75 basis points to its interest rate.
With this, the referential is already located at 7.75 percent as a consequence of an upward cycle that began almost a year ago, on June 24, 2021. In that time, the institution has increased the interest rate at 375 basis points.
Jonathan Heath, deputy governor of Banxico, had already anticipated that the consensus in the Governing Board pointed to an increase of 75 points, even before the United States Federal Reserve applied a ‘smack’ to its interest rate with the largest increase in more than 27 years.
The Governing Board, which made the decision by unanimitypointed out that “it will closely monitor inflationary pressures, as well as all the factors that affect the expected trajectory for inflation and its expectations.”
Banxico made it clear that the rate increases will continue and did not rule out applying a new increase of 75 points to the rate “In case it is required”.
they are already nine consecutive hikes to Banxico’s benchmark (the last four of 50 basis points) in a context where inflation has become the coconut’ of the economy of Mexico and the world. Just this Thursday, the National Institute of Statistics and Geography (Inegi) reported that the National Consumer Price Index stood at 7.88 percent per year in the first half of June.
The prices of potatoes and other tubers, chicken, electricity, packaged soft drinks and oranges contributed to inflation reaching its highest level since the first fortnight of January 2001when it remained at 8.37 percent.
Inflation has already more than 15 months outside Banxico’s target range (3 percent, +/- one percentage point) and now the central bank’s forecast is that the index will return to that level until the third quarter of 2023.
In addition, Banxico updated its inflationary forecast for 2022 upwards, since it now foresees that the National Consumer Price Index will close this year at 7.5 percent, an increase of 110 basis points compared to the previous estimate (6.4 percent).
Will the remedy be worse than the disease?
The main effect of an increase in the interest rate is to increase the cost of money, which in turn can lead to a reduction in domestic consumption and, therefore, help combat inflation.
The negative side of this remedy is, however, in the growth of the economy. In fact, in the US, the increases that the Fed has made to its rate have already aroused fear of a new recession.
This week, Jerome PowellFed chairman, made his most explicit acknowledgment to date of that problem, saying it’s possible and calling a soft landing “very challenging.”
With information from Bloomberg and Guillermo Castañares