Chito Padilla
CEO & Co-Founder
Expert Contributor

How Does the Bank of Mexico’s Interest Rate Impact Us?

By Chito Padilla | Mon, 08/29/2022 - 15:00

Inflation is causing difficulties in the Mexican economy, having increased in June to the 7.99 percent mark, up 0.84 percent compared to the previous month. As a result, the Bank of Mexico's board members, in their last meeting on June 23, decided to increase its overnight interest rate by 75 basis points to 7.75 percent. It is expected that future decisions will also include aggressive increments.

Mexico is not the only country that is making these decisions. Most central banks in other parts of the world are boosting rates. For example, the US took the same decision as Mexico some weeks ago and raised its benchmark rate by 75 basis points.

Even though inflation and interest rates are expected to continue rising, Banxico has stated that board members still hope to reach the bank’s 3 percent inflation goal by 1Q24. In the meantime, some analysts have projected that the key interest rate would hit 8.5 percent by next August; however, others expect that Banxico will hit the 9 percent mark by the end of this year. The last time Banxico had an interest rate above 8 percent was in December 2018, when it was 8.25 percent.

Rising inflation, primarily caused due to the impact of external factors on the Mexican economy, has led the Bank of Mexico to try to cool down the dynamics of the national economy. This is because the overnight interest rate works as an instrument to influence the rates used in the financial system, impacting the economy.

But what does this mean for people? In summary: faced with inflationary pressures, the rate is raised to discourage consumption and, consequently, everything that users acquire on credit will cost more.

This increase can reduce the amount of credit in play as people seek to finance their purchases in another way or pay in cash. But it also offers specific opportunities, such as choosing the credit card that provides the best services and interest rates on their purchases.

Loans will not be affected since they are usually agreed at a fixed rate. In any case, there may be a negative impact on new loans or those few that are held at a variable rate, such as some business loans.

Regarding whether the increases in the interest rate are beneficial when people decide to invest, we must bear in mind that at this time it is 7.75 percent, and inflation at the end of June registered a level of 7.99 percent, which is bad news for both investors and consumers.

So, is it better not to invest? The answer is that it is always better to invest than not. Although there probably won't be much in terms of return, people will be better protected against inflation.

Like almost everything in economics, it is essential not to be surprised by first impressions: it seems that an increase in the interest rate benefits investors. Still, the reality is that if it is higher, it is because inflation is still not controlled, even the goal is to reduce it with the rate support. However, it is always better for money to lose a bit of purchasing power than to lose more because of inflation.

On the other hand, the pandemic has taught us that paying on time and the total of our debt is not enough in the case of credit cards. By choosing products that have better interest rates, we reduce the probability of being affected if we have to delay our payments or pay only the minimum when reference rates are high. Again: the message is to ignore the first impression.

Let's not forget that the Bank of Mexico seeks to promote savings and discourage consumption, primarily through credit, to stabilize prices and reduce inflation. With low interest rates, credit is encouraged, the demand for goods and services increases, and there may be higher inflation. With high interest rates, the opposite effect occurs.

Therefore, the recommendation is to manage our budgets intelligently while the effects of economic, social, and political factors pass or are brought under control.

Similarly, it is essential not to forget that it is up to us, supported by technology, to defend our money in this inflationary cycle.

From its trench, Fintonic wants to send the same message: Today, fintechs can be the solution for many Mexicans to face this economic phenomenon in the best way by monitoring their income and expenses with applications that allow them to be aware of their cash flow and spot opportunities to manage it better.

Today more than ever, we must be clear that when the economy is affected, that is when entrepreneurs have significant opportunities due to their natural countercyclical effect. This moment is an opportunity for fintech companies in the region to help the population get ahead of this bleak economic outlook.

Photo by:   Chito Padilla