Banxico Raises Overnight Interbank Interest Rate to 11.00%

The Bank of Mexico (Banxico) increased the target interbank rate by 50 base points to 11.00%. While the US Federal Reserve (Fed) argues that Banxico will continue to raise its interest rate to tackle inflation, Mexico’s central bank said that following the evolution of data, future increases will likely be smaller. 

The rate hike became effective on Feb. 10, 2023. Banxico explained via its most recent monetary policy announcement that global economic growth presented moderated growth during 4Q22, as the outlook for 2023 forecasts a clear slowdown. Banxico highlighted that global inflation continues to affect most countries and that lower energy prices have helped headline inflation decrease. The US Federal Reserve continued to increase reference rates and explained that said rates will remain high for a prolonged period, most central banks have followed similar policies. 

“We expect Banxico to continue limiting the pace of hikes in the target rate, taking it to a terminal level close to 11.00% in 1Q23, and we do not rule out a subsequent slight deviation from the Fed's actions,” says Alejandro Saldaña, Chief Economist, Bx+ Financial Group, as reported by MBN.

The most notable risks are those related to the pandemic, the prolongation of inflationary pressures, worsening geopolitical tensions and monetary conditions and tighter finances, according to Banxico. However, the Mexican peso has appreciated, while short-term interest rates have increased. During 4Q22, the Mexican economy grew but lost dynamism in comparison to previous quarters, says Banxico. 

During the past few years, Banxico has followed the interest rate decisions of the US Fed to face a looming global recession. However, investment bank UBS explained that Banxico has tried to disengage from the Fed but this decision will depend on the behavior of inflation. 

James Bullard, President, US Fed, explained that inflation is likely to ease up in 2023 and attributed the success to GDP growth during 2H22. Banxico highlighted that regardless of the forecasts, raising interest rates will still be necessary to tackle inflation. “The Governing Board considers that given the monetary stance that has already been reached and based on the evolution of the data, an increase in the reference rate at the next meeting may be smaller,” says Banxico.