Wednesday, May 29, 2024

Central bank raises interest rate to 7.7%, biggest increase since 2008

The central bank has raised its benchmark interest rate by 75 basis points to 7.75%, the highest level since late 2019.

It was the first time since the introduction of a new monetary policy regime in 2008 that the Bank of México (Banxico) lifted its key rate by three-quarters of a percentage point. The decision, made at the governing board’s meeting on Thursday, followed 0.5% hikes at each of the previous four meetings. Banxico has now lifted rates at nine consecutive meetings.

In a statement, the bank noted that in the first half of June, headline and core inflation reached 7.88% and 7.47%, respectively, “remaining at elevated levels unseen in two decades.”

In addition to inflationary shocks stemming from the pandemic, Banxico said there were inflationary pressures associated with Russia’s invasion of Ukraine and strict lockdown measures imposed by China to slow the spread of the coronavirus.

In consideration of “the magnitude and diversity of the shocks that have affected inflation” and “the increasing challenges for monetary policy stemming from the ongoing tightening of global financial conditions,” among other factors, the board decided unanimously to raise the target for the overnight interbank rate by 75 basis points.

The bank said the board intends to continue raising the reference rate, foreshadowing another 0.75% hike if required by economic conditions.

Janneth Quiroz, deputy director of economic analysis at the Monex financial group, and Adrián Muñiz, who holds the same position at the brokerage firm Vector, both said that another 0.75% hike rate, or even a 100-basis-point one, is not out of the question in the near future. The bank’s future decisions will depend on inflation levels and monetary policy in the United States, they said.

The central bank predicted that headline inflation, which doesn’t strip out volatile food and energy prices, will increase to 8.1% in the third quarter before falling to 7.5% in Q4. It forecasts further declines in all four quarters of next year, with an anticipated headline rate of 3.2% at the end of next year and 3.1% in Q2 of 2024. Banxico targets 3% annual inflation with tolerance of 1% in both directions

With reports from Reforma and El Universal 

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