Banxico Interest Rate Raise Announced Too Early
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Banxico Interest Rate Raise Announced Too Early

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María José Goytia By María José Goytia | Journalist and Industry Analyst - Tue, 03/29/2022 - 09:04

In an effort to combat increased inflation, Mexico’s Central Bank (Banxico) decided to increase its interest rate by 50 points, setting it at 6.5 percent.  However, the announcement of the new rate sparked some controversy, as President López Obrador's let Banxico's plans slip prematurely.

Due to inflationary pressures generated by supply chain bottlenecks, rising energy and food prices, new geopolitical tensions and the uncertainty of the pandemic’s economic recovery, Banxico's board announced its unanimous decision for an increase in the interest rate by 50 points. The measure seeks to combat inflationary pressure, which during the first two weeks of March stood at 7.29 percent.

During the past year, inflation hovered above Banxico’s target range of 3 percent, oscillating around the 4 percent mark. To address the situation, the central bank began raising interest rates as of summer 2021. This latest increase marks the seventh consecutive time that Banxico raises the interest rate, as well as the third in a row where the increase is 50 points.

The decision was scheduled to be announced on Thursday, March 24 at 1:00 p.m. However, contrary to Banxico's policies and legal provisions, President López Obrador announced the policy change during his morning press conference on Thursday.

"Yesterday, Banxico’s rate increased 0.5 percent. We will have an interest rate of 6.5. When it increases, there is less investment and inflation is supposed to go down. It is a control mechanism. The decision was made unanimously by the board and we respect their autonomy," said the president.

Monetary policy decisions are made by Banxico’s Board of Governors, consisting of Governor Victoria Rodríguez Ceja and Deputy Governors Irene Espinosa, Gerardo Esquivel, Jonathan Heath and Galia Borja. The meetings are usually attended by a representative of the Ministry of Finance, either by Minister Rogelio Ramírez de la O, Undersecretary Gabriel Yorio or by the Minister of the Government’s Board, Elías Villanueva.

Banxico’s Law states that those who attend the sessions must "keep confidentiality regarding the matters discussed unless expressly authorized by the Board of Governors to issue any communication." So far, the source of the leak remains unknown, although speculations point toward the Ministry of Finance.

After the incident, several experts regretted the president's actions and warned that such situations may violate the autonomy of the central bank. Carlos Capistrán, Chief Economist, Bank of America Securities, expressed his concern as these issues contribute to economic uncertainty. "The premature announcement adds uncertainty to the markets and is something that has never happened in Mexico before,” he said.

Gabriel Casillas, Head of Economic Research, Barclays, regretted the president's comments. "It is unfortunate because Banxico has mechanisms established to avoid this type of situation. But as the president has said before, he is an open book. Therefore, I do not think this affects the autonomy of the central bank, although it does create unnecessary noise."

On the afternoon of March 24, President López Obrador publicly apologized for the leak during his inaugural speech at the 85th Banking Convention in Acapulco: "I want to offer an apology to Baxico’s governor and deputy governors, because I received the information about the decision to increase the rate to 6.5 percent last night and I thought it had already been made public. I want to tell them that I reaffirm my commitment to respect the autonomy of the central bank."

Following the apology, Banxico's deputy governors Irene Espinosa and Gerardo Esquivel expressed that the president's mistake was due to ignorance regarding the timing and in no way affects the central bank's autonomy. "He gave a very clear message that he had received information and did not know that this was not yet public, so there has not been any kind of interference," said Espinosa.

An increase in interest rates is one of the main tools the central bank has to combat rising inflation and protect purchasing power. As inflation has remained above the target rate for several weeks, Banxico increases its interest rates to counteract the trend. With higher interest rates, the use of credit becomes more expensive while saving becomes more attractive. These incentives decelerate consumption, which eventually promotes a reduction in prices due to a contraction in demand.

However, credibility and certainty for the autonomy of the central bank are fundamental if these monetary policy decisions are to have their desired impact. Concerns in the financial sector regarding the president's indiscretion could call the autonomy of the institution into question. If repeated, such incidents could jeopardize the central bank’s trustworthiness and therefore Mexico’s economic stability.

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