Banco de México Raised Rates for 11th Straight Time to Record 9.25%

The Mexican Central Bank, Banco de México raised rates for the 11th consecutive rate increase since June of 2021 and third straight by 75 basis points to 9.25% matching the previous three interest-rate moves by the U.S. Federal Reserve. The bank again increasing its forecasts for headline and core inflation forecasts. The size of future rate increases will depend on prevailing conditions, the bank added.

mexico central bank

Banco de México’s Governing Board decided to raise the target for the overnight interbank interest rate by 75 basis points to 9.25%, effective September 30, 2022.

Banxico said its board “will assess the magnitude of the upward adjustments in the reference rate for its next policy decisions based on the prevailing conditions.”

The vote was unanimous. Voting in favor of the decision were Victoria Rodríguez, Galia Borja, Irene Espinosa, Gerardo Esquivel, and Jonathan Heath.

The move follows the U.S. Federal Reserve’s hike last week of three-quarters of a percentage point, its largest increase in more than 25 years. Policy makers in regional powerhouse Brazil raised rates to 13.75% and penciled in another hike for September.

Highlights

  • It was the 11th consecutive rate increase since June of 2021 and third straight three-quarter point rise
  • Highest level since the Banco de México adopted the interest-rate target in 2008.
  • Mexico’s inflation stood at 8.15% at the end of July, its highest level since December 2000. The core consumer-price index, which excludes energy and agricultural products but includes processed food, rose to 7.65%, also a more than 21-year high.
  • The bank noted the Fed’s three consecutive three-quarter point increases in the federal-funds rate and rate increases by a large number of other central banks. The size of future rate increases will depend on prevailing conditions, the bank added.

“We anticipate Banxico will continue its policy tightening to avoid further de-anchoring of inflation expectations against a backdrop of stubbornly high inflation,” said Carlos Morales, sovereign director at Fitch Ratings, who projected the policy rate will reach 10% by year end.

Inflation Forecast

The Banco de México’ said the accumulated inflationary pressures associated with both the pandemic and the military conflict continue affecting headline and core inflation, which in the first half of September registered annual rates of 8.76% and 8.27%, respectively, thus remaining at levels unseen in two decades.

Market Reaction

The Mexican peso gave back some gains in the wake of the rates decision, trading at 19.98 against the U.S. dollar versus 19.92 earlier in the day.

Goldman Sachs’s chief Latin America economist Alberto Ramos said in a note. The central bank statement was “slightly more dovish” that the previous one, “In our assessment, the case for a follow-up 75 basis-point rate hike in September would have to be supported by additional negative inflation surprises and further deterioration of inflation expectations, alongside a hawkish Sept. 21 FOMC decision and guidance,”


Banco de México Monetary Policy Statement August 11, 2022

Banco de México’s Governing Board decided to raise the target for the overnight interbank
interest rate by 75 basis points to 9.25%, effective September 30, 2022

Timely indicators suggest that world economic activity has continued decelerating during the third
quarter. Global inflation continued increasing in an environment where imbalances between demand and
supply in several markets and high levels of food and energy prices persist. This continues generating
expectations of an accelerated monetary tightening worldwide and of reference rates at elevated levels
for an extended period. Financial conditions remained tight while the dollar continued gaining strength.
In its latest monetary policy decision, the Federal Reserve raised the target range for the federal funds
rate by 75 basis points for a third consecutive time and anticipated future adjustments. Job creation in
that country remained strong, and although inflation continued decreasing moderately, it is still at high
levels. In turn, a large number of other central banks have continued raising their reference rates, some
of them by higher-than-foreseen magnitudes. Among key global risks are those associated with the
pandemic, the persistence of inflationary pressures, the intensification of geopolitical turmoil, and greater
adjustments in economic, monetary and financial conditions.

In domestic financial markets, the peso remained stable, while interest rates of government bonds
increased throughout the entire yield curve. The rate of growth of economic activity during the third
quarter is expected to slow down relative to that observed during the first half of the year, although slack
conditions are expected to continue decreasing. An environment of uncertainty prevails, while the
balance of risks for economic activity remains biased to the downside.

The accumulated inflationary pressures associated with both the pandemic and the military conflict
continue affecting headline and core inflation, which in the first half of September registered annual rates
of 8.76% and 8.27%, respectively, thus remaining at levels unseen in two decades. Their expectations
for 2022 and 2023 rose again, while those for the medium term adjusted slightly upwards, and those for
the long term remained stable, although above the target.

In view of greater-than-anticipated inflationary shocks and an outlook that their effects will take longer to
dissipate, forecasts for headline and core inflation were revised upwards for the entire forecast horizon.
In this complex environment, inflation is projected to converge to the 3% target in the third quarter of
2024 (see Table).

These projections are subject to risks.

On the upside:

  • i) Persistence of core inflation at high levels.
  • ii) External inflationary pressures associated with the pandemic.
  • iii) greater pressures on agricultural and livestock product prices and on energy prices due to the ongoing geopolitical conflict;
  • iv) exchange rate depreciation; and
  • v) cost-related pressures.

On the downside:

  • i) a greater-than-anticipated slowdown in world economic activity;
  • ii) a decline in the intensity of the geopolitical conflict;
  • iii) a better functioning of supply chains;
  • iv) a greater-than-expected effect from the negative output gap; and
  • v) a larger-than-anticipated effect from the Policy Program to Fight Inflation and High Prices (PACIC, for its Spanish acronym). The balance of risks for the trajectory of inflation within the forecast horizon remains biased significantly to the upside

The Governing Board evaluated the magnitude and diversity of the shocks that have affected inflation
and its determinants, along with the evolution of medium- and long-term inflation expectations and the
price formation process. It also considered the increasing challenges for monetary policy stemming from
the ongoing tightening of global financial conditions, the environment of significant uncertainty, the
inflationary pressures accumulated as a result of the pandemic and the geopolitical conflict, as well as
the possibility of greater effects on inflation. Based on these considerations, and with the presence of all
its members, the Board decided unanimously to raise the target for the overnight interbank interest rate
by 75 basis points to 9.25%. With this action, the monetary policy stance adjusts to the trajectory required
for inflation to converge to its 3% target within the forecast horizon.

The Board will thoroughly monitor inflationary pressures as well as all factors that have an incidence on
the foreseen path for inflation and its expectations. This, in order to set a policy rate that is consistent at
all times, with both the orderly and sustained convergence of headline inflation to the 3% target within
the time frame in which monetary policy operates as well as with an adequate adjustment of the economy and financial markets. The Board will assess the magnitude of the upward adjustments in the reference rate for its next policy decisions based on the prevailing conditions.

Source: Banco De Mexico

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