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News Article

Banxico Makes Modest Cut to Interest Rate

By Peter Appleby | Thu, 09/24/2020 - 14:18

Banxico has cut the benchmark interest rate by a modest 25 points to 4.25 percent as it seeks to counteract a rising rate of inflation that threatens the country’s fragile economic recovery, still reeling from the impact from COVID-19.

Mexico’s Central Bank released a statement this afternoon explaining its decision, saying “Banco de Mexico’s Governing Board decided to lower the target for the overnight interbank interest rate by 25 basis points to 4.25 percent, effective September 25, 2020.” In August, Banxico had decided to reduce the interest rate to 4.5 percent, its lowest level in four years.

The statement noted that “the challenges for monetary policy posed by the pandemic include both the significant impact on economic activity as well as a financial shock and their effects on inflation,” though that “having contracted markedly in April and May, economic activity in Mexico began to recover in June and July, although an environment of uncertainty and downward risks prevails. Ample slack conditions are expected throughout the time frame in which monetary policy operates.”
The National Consumer Price Index reported that inflation stood at 4.10 percent in September after a small rise of 0.16 percent during the month’s first two weeks. This rate is higher than the 2 percent to 4 percent range Banxico had set in place earlier this year, while private analysts had expected inflation to close at between 3.82 percent and 3.61 percent, said Yahoo Finance.

With the COVID-19 virus still raging across many parts of the world including Mexico, analysts, governments and public authorities have given varied and contrasting opinions on the state of Mexico’s economic recovery. In August, Banxico said that the Mexican economy could contract by up to 12.8 percent in 2020 and recover between 1.3 percent and 5.6 percent in 2021. This month, the United Nations Trade & Development Report predicted that “the Mexican economy would record an alarming fall of 10 percent in 2020 and a rise of 3 percent in 2021.”

Recovery will depends on a number of factors, but the sensitive balance between interest and inflation may be a deciding factor. Should inflation rise too highly, consumption could fall and further choke growth in a country that has been among the hardest hit by the virus.

The federal government has been criticized for not rolling out some form of fiscal support packages similar to those seen in many other countries. But yesterday Finance Minister Arturo Herrera announced that Hacienda and the National Banking and Securities Commission, in charge of regulating the country’s financial institutions, had created a program to help people who had lost their jobs or some income due to the virus and needed to repay their credit or loans to financial institutions - now the six-month deferment period had ended. The program will reduce monthly payments by 25 percent  and extend the payment times by up to 50 percent, said the minister.

“We are looking for these restructures to have a reduction in interest rates, extensions of credit terms, in relation to what is planned.... All these restructurings must be based on a new evaluation of the payment capacities  of the borrowers. Banks have the obligation to have their credit files complete and have to carry out the payment evaluations of their borrowers,” said President of the CNBV Juan Pablo Graf Noriega.

Photo by:   Ri Butov, Pixabay
Peter Appleby Peter Appleby Journalist and Industry Analyst