Banxico Explains Reasoning Behind Interest Rate Hike
Mexico’s Central Bank (Banxico) explained in its Minute number 98 the reasoning behind the monetary policy decision announced on Feb. 9, 2023. In the document, Banxico explains that this and other measures aim to reduce inflation to 3%.
In February 2023, Banxico’s board of governors met virtually to increase by 50 basis points the target for the Overnight Interbank Interest Rate to 11.00% after analyzing Mexico’s external environment, economic activity, inflation, macrofinancial environment and monetary policy.
The board explained that the world economy grew moderately during 4Q22 and attributed the pace to the effects of the war in Ukraine, the outbreak of infections in China and to astringent monetary conditions. The Board mentioned that signs point to disruption in international trade, while advanced manufacturing and services indicators show contractions.
The board highlighted that Mexico’s GDP appeared to grow during 4Q22, but that it decreased in comparison to previous quarters. The members attributed the slow-paced growth to a weakening of industrial activities, services and a drop in exports. However, primary activities remained dynamic according to one of the members of the board.
Inflation reached 7.91% in January 2023, while its underlying component stood at 8.45%. Headline inflation was lower than expected but underlying inflation climbed. Pressures on global inflation have eased, which indicates that inflationary pressures in Mexico will likely moderate. The board added that seasonally adjusted monthly variations and annualized rates of headline inflation have declined since August 2022.
National financial markets appeared to show orderly behavior, while international investors seem to show “appetite” in Mexico. However, the board noted that the financial conditions index for Mexico presented a slight decrease. Credit default premiums reported reductions of 20 basis points at five years and the stock market grew, factors that were attributed to the behavior of consumer and industrial sectors.
The Governing Board explained that after evaluating the magnitude and diversity of inflationary shocks, its determinants, the evolution of the medium and long-term expectations and the price formation process and more factors, a unanimous agreement was reached to increase the Interbank Interest Rate to 11.00%. “With this action, the monetary policy stance is in line with the trajectory required for inflation to converge to the target of 3% within the horizon of the forecast,” says Banxico.