Banxico raised the interest rate to 8.5%, a historical level due to inflation in Mexico

The Bank of Mexico raised the interest rate by 75 base points for the second consecutive time to set it at 8.5%, a historical maximum for this institution that is undergoing a harsh adjustment to monetary policy to try to combat the high level of general inflation in Mexico, which remains at the highest level of the last two decades.

For the Bank of Mexico, the previous record in its interest rate was 8.25%, which was presented in August 2008 and December 2018, so the level of this August 11 represents the highest in its history.

This hike of 75 base points was a decision taken unanimously by the members of the Governing Board, who agreed on the need to adjust monetary policy to counteract the inflationary pressure on the prices of goods and services in the country.

They added that the accumulated inflationary pressures derived from the Covid-19 pandemic and Russia’s invasion of Ukraine continue to affect general and underlying inflation, which in July registered annual rates of 8.15% and 7.65%, respectively, remaining at unobserved levels in two decades.

He explained that in the face of higher than anticipated inflationary pressures, the forecasts for general and core inflation were revised upwards until the third quarter of 2023, although they maintain the forecast of reaching the 3% goal in the first quarter of 2024.

Banxico follows the path of the FED

Announcing its decision this Thursday, Banxico stated that in its most recent decision, the United States Federal Reserve also increased the target range for the federal funds rate by 75 basis points for the second consecutive time and anticipated future increases.

The decision of Banxico’s Governing Board on August 11 coincided with the forecasts of specialists, who anticipated that the central bank would increase the cost of credits by 75 basis points to 8.5%, an action similar to that of the US Federal Reserve.

“As the United States continues to raise rates, we are going to see a similar behavior from Banco de México,” said Ignacio Saralegui, senior investment strategist for Latin America, at asset manager Vanguard, who highlighted the growth of the Gross Domestic Product (GDP) of Mexico in the second quarter of the year.

Upward cycle in Banxico

Since May of last year, the Bank of Mexico has raised the target for the overnight Interbank Interest Rate by 450 basis points, after inflation began to accelerate above the target of 3% +/- one point percentage.

Even so, the National Consumer Price Index (INPC) has failed to moderate, so inflation stood at 8.15% year-on-year at the end of July, its highest level since the beginning of 2001.

According to the Reuters survey, the key rate would close 2022 at 9.5%, which implies moderation in the pace of monetary tightening over the course of the last three meetings remaining in the monetary policy year.

The Governing Board said this Thursday, August 11, that it will assess the magnitude of the upward adjustments in the reference rate at its next meetings in accordance with the prevailing circumstances, thus leaving the door open to further increases.

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