Banxico’s Interest Rate Reduction Is Still Not Enough

Banxico yesterday reduced the interbanking interest rate (TIIE) in 50 base points to reach a 5.5 percent level, by a unanimous voting. It is the fourth time that Banxico reduces the interest rate in the year and experts believe that it will not be the last. The 5.5 percent rate is the lowest level since December 2016.

In its press release, Banxico announced that “in light of the complex economic and financial standing at a global level, Banxico has closely followed the behavior of national financial markets, economic activity and inflation to take the necessary actions in an opportune manner. The COVID-19 pandemic and the adopted measures to prevent it from spreading have affected considerably global economic activity. This has led to an unprecedented reduction of economic expectations.”

Banxico also mentions that the current environment has led to an important deterioration of global financial conditions, which has made investors seek refugee in assets with less risk and leave emerging economies. “This adjustment led to a depreciation of currencies and volatility in exchange markets, including the Mexican peso.” Moreover, the central bank acknowledged that the magnitude and duration of the current emergency are unknown but that the employment contraction we have seen is bound to be steeper in the near future.

Experts believe that the country’s interest rate will continue going downwards. A poll conducted by Citibanamex between economists expects 2020 to end with a 4.75 percent interest rate while analysts from BBVA expect 2020 to finish with a 3 percent rate, the lowest level since mid-2014. Nevertheless, Gabriel Casillas, Chief Economist of Grupo Financiero Banorte, said that the reduction in interest rates was something the market already expected and thus did not create a major impact on the market. “The market was already expecting this reduction, even if the interest rate lowers to 4.5 in two more months, it is something the market already expects will happen, so we will not see a major impact on the exchange rate because of this.”

Banxico also mentioned that other central banks have taken upon themselves to implement a series of policies to “reduce their interest rates and implement other extraordinary measures to promote the good functioning of their financial systems.”

Banxico also mentioned that different countries have, in addition to reducing their interest rates, implemented different fiscal stimulus to mitigate the adverse effects of the pandemic. However, in Mexico these fiscal measures have not taken place. President López Obrador has been adamant in saying that the current government will not provide any fiscal incentives for companies. The lack of willingness from the government to implement incentives to alleviate the private sector’s fiscal burdens has been a tipping point in the relationship between the private and public sectors.