Bank of Mexico raises interest rate to 4.75% reflecting inflation fears

RIO DE JANEIRO, BRAZIL – The Bank of Mexico (Banxico) on Thursday (30) raised the annual interest rate to 4.75%, which represents the second consecutive 25 basis points increase of the target amid growing concerns about inflation.

The central bank’s Board of Governors approved this decision with a new split vote in which three members supported the new rate, and two preferred to keep it at 4.25 %, the level it has had since June.

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“It was considered necessary to strengthen the monetary stance to avoid affecting inflation expectations and promote an orderly adjustment of relative prices and the convergence of inflation to the 3% target,” the board argued in its statement.

The regulator detected pressures in headline and core inflation, which registered annual rates of 5.81% and 4.66% in July, respectively.

Therefore, it argued that “headline and core inflation expectations in 2021 increased again”, although it clarified that the shocks that have affected inflation are expected to be transitory.

The board also justified the increase because the recovery of the Mexican economy “continued during the second quarter” and “is expected to continue for the rest of the year”.

Even so, it acknowledged risks due to the increase in Covid-19 infections, which have just surpassed 3 million confirmed cases and 246,000 deaths in Mexico amid the third wave.

“While the pandemic has complicated the assessment of the economy, slack conditions are expected with marked differences between sectors,” he said.

This is the second consecutive increase the central bank had made to the interest rate since June 24, when it raised it from 4% to 4.25%. Previously, the central bank had kept the reference rate at 4% since February, the lowest since mid-2020.

The autonomous body now showed the same divided vote as in June, with Governors Alejandro Díaz de León, Irene Espinosa, and Jonathan Heath voting in favor of an increase.

Meanwhile, repeating their vote against was Galia Borja and Gerardo Esquivel, both appointed by the current president, Andres Manuel Lopez Obrador.

Banxico has forecast that Mexico’s GDP will grow by up to 7% in 2021 after a historic contraction of 8.2% in 2020.

As upside risks, the agency listed external inflationary pressures, cost pressures, persistence in core inflation, exchange rate depreciation, and increases in agricultural prices.

On the downside, it considered the effects of the negative output gap, more significant social distancing measures, and exchange rate appreciation.

Banco de México’s subsequent monetary policy announcement is scheduled for September 30.