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The central bank's headquarters in Mexico City. The central bank's headquarters in Mexico City. Wikimedia Commons CC BY-SA 3.0

Bank of México hikes interest rate to 8.5%

The economy is gradually recovering but 'an environment of uncertainty prevails'

The Bank of México (Banxico) has increased its benchmark interest rate by 75 basis points to 8.5%, the highest level since a new monetary policy regime was introduced in 2008.

It was the second consecutive time that the central bank lifted its key rate by 0.75% after the governing board took the same decision in late June. The board, which met Thursday, has now lifted the benchmark rate at 10 consecutive monetary policy meetings.

The latest decision came after the national statistics agency INEGI announced Tuesday that inflation reached 8.15% in July, the highest level in 22 years.

In a statement announcing its rate hike, Banxico said that inflation was rising globally within a context of imbalances between demand and supply and persistent high prices for food and energy.

The impacts of inflation have been felt both in Mexican markets and around the world, as food and energy prices rise.
The impacts of inflation have been felt both in Mexican markets and around the world, as food and energy prices rise.

“Among key global risks are those associated with the pandemic, the persistence of inflationary pressures, the intensification of geopolitical turmoil, and greater adjustments in economic, monetary and financial conditions,” the bank said.

In Mexico, Banxico said that the peso remained stable (one greenback was worth about 19.8 pesos early Friday afternoon) and that recent information indicated that economic growth in the second quarter — 1.9% — was similar to that in the first quarter, signifying a gradual recovery from the pandemic-induced downturn.

“Nevertheless, an environment of uncertainty prevails, while the balance of risks remains biased to the downside,” the central bank said.

“The accumulated inflationary pressures associated with both the pandemic and the military conflict [in Ukraine] continue affecting headline and core inflation, which in July registered annual variations of 8.15% and 7.65%, respectively,” Banxico said.

The bank said that the governing board “evaluated the magnitude and diversity of the shocks that have affected inflation” as well as “increasing challenges for monetary policy stemming from the ongoing tightening of global financial conditions and “the environment of significant uncertainty.”

“… Based on these considerations, … the board decided unanimously to raise the target for the overnight interbank interest rate by 75 basis points to 8.5%. With this action, the monetary policy stance adjusts to the trajectory required for inflation to converge to its 3% target within the forecast horizon,” Banxico said.

The central bank anticipates that inflation will reach 8.5% this quarter before falling to 8.1% in Q4. Further easing is forecast for 2023, with rates of 7.1%, 5%, 3.7% and 3.2% predicted for quarters 1 to 4, respectively. Banxico’s inflation outlook extends to the first two quarters of 2024, during which a rate of 3.1% is forecast.

The bank said it will continue to monitor inflationary pressures as it seeks to set a benchmark rate that will allow inflation to come down to its target “within the time frame in which monetary policy operates.”

The governing board’s next monetary policy meeting is scheduled for September 29.

With reports from Milenio

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