Banxico to Increase Interest Rate AgainBy Sofía Hanna | Fri, 06/17/2022 - 15:46
The Bank of Mexico (Banxico) announced it is considering increasing its interest rate by 75 basis points, following a similar action by the US Federal Reserve (Fed). Banxico’s decision comes after an earlier move to gradually increase the interest rate by 50 basis points taken Sep. 2021. The Sep. 2021 decision involved a moderate increase of 25 basis points during the last two months of 2021, closing the year with an interest rate of 9.5 percent.
“Banxico is trying to quickly put the monetary policy rate above neutral to reduce inflation, especially core inflation, and to prevent the peso from depreciating too much against the dollar to avoid external pressure on prices,” the institution said. Banxico’s Governing Board will also analyze the US Fed’s decision to increase interest rates for next week’s monetary policy announcement. “The increase of 75 base points, as was repeatedly mentioned during the decision that led to the previous monetary policy announcement. It is on the table… the decision may come in a few days,” Gerardo Esquivel, Deputy Governor, Banxico.
The Fed’s interest rate hike has led economists at Bank of America (BofA) Securities to predict that the US has a 40 percent chance of entering a recession. “Our worst fears about the Fed have been confirmed: they fell far behind and are now playing a dangerous game of catch-up. The firm expects the Fed to raise interest rates above 4 percent,” wrote Ethan Harris, Global Economist, BofA. Although the risk exists, the recession risk for this year continues to be considered low. The Fed’s decision aims to prevent a recession in the US following the rise in energy prices in the context of the Russia-Ukraine war. The decision is also likely to impact Mexico.
Beyond Banxico’s potential interest rate hike, Mexico’s strategic plan to fight inflation includes an anti-inflationary plan that also aims to increase grain production and support for fertilizer distribution, build a strategic corn reserve using resources from the Mexican Food Security (SEGALMEX) organization and guarantee stable prices for corn, beans, rice and milk to strengthen production, as previously reported by MBN. The plan also includes a six-month pause in tariffs on the import of basic goods and supplies.