Banxico surprises with a rate hike of 50 basis points to 11%

He Banco de México (Banxico) has announced an interest rate hike of 50 basis points at its February meeting, placing it in the eleven% from the previous 10.50%, 25 points above the 10.75% expected by the market. This level represents the new all-time high recorded since the country began its current monetary policy in 2008.

Banxico statement

The Governing Board of Banco de México decided to increase the target for the Overnight Interbank Interest Rate by 50 base points to a level of 11.00%, effective as of February 10, 2023.

Global economic growth moderated during the fourth quarter of 2022. The outlook for 2023 continues to point to a slowdown. Global inflation remains high, although general inflation fell in a large number of economies due to less pressure on energy prices. In several cases, the underlying component has not yet shown a turning point to the downside. Most of the central banks, including the US Federal Reserve, continued to increase their reference rates and announced that these rates will remain high for an extended period. Among the global risks, those associated with the pandemic, the prolongation of inflationary pressures, the worsening of geopolitical tensions and tighter monetary and financial conditions stand out.

Since the last decision, the Mexican peso appreciated. For their part, short-term interest rates increased and medium- and long-term interest rates decreased. In the fourth quarter of 2022, the Mexican economy continued to grow, although it lost dynamism compared to what was observed in previous quarters.

In January, general inflation increased to settle at 7.91%. The subjacent component, which better reflects the inflation trend, stood at 8.45%, surprising on the rise. This is due to a slower decline than expected in the inflation of food merchandise and the rebound in that of services. For 2023 and 2024, inflation expectations increased againwhile those with a longer term decreased slightly, although they remain above the target.

Given a slower-than-expected disinflation process, the forecasts for headline and core inflation were adjusted upwards for the entire horizon. Inflation is expected to converge to the target in the fourth quarter of 2024. These forecasts are subject to risks. On the rise: i) persistence of core inflation at high levels; ii) pressures on energy or agricultural prices; iii) the reopening of the Chinese economy; iv) exchange rate depreciation; and v) higher cost pressures. On the downside: i) a greater than anticipated slowdown in the global economy; ii) a decrease in the intensity of the geopolitical conflict; iii) better functioning of supply chains; iv) less transfer of some cost pressures; and v) a greater than expected effect of the Federal Government’s measures in light of the shortage. The balance of risks with respect to the path expected for inflation in the forecast horizon remains biased upwards.

The Governing Board evaluated the magnitude and diversity of inflationary shocks and their determinants, as well as the evolution of medium- and long-term expectations and the price formation process. He considered the challenges faced by the tightening of global financial conditions, the environment of uncertainty, the persistence of accumulated inflationary pressures and the possibility of greater effects on inflation, as well as the monetary position that has already been reached in this upward cycle.

In particular, it determined that, given the dynamics of underlying inflation, on this occasion it is necessary to repeat the magnitude of the increase in the reference rate of the previous meeting, in order to be in a better position to face a still complex inflationary environment. Based on the foregoing, and with the presence of all its members, unanimously decided to increase the target for the Interbank Interest Rate by 50 base points one day at a level of 11.00%. With this action, the monetary policy stance adjusts to the trajectory required for inflation to converge to its 3% goal within the forecast horizon.

The Governing Board will closely monitor inflationary pressures, as well as all the factors that affect the forecast path for inflation and its expectations. This, with the objective of determining a reference rate that is consistent at all times, both with the orderly and sustained convergence of general inflation to the 3% target in the term in which the monetary policy operates, as well as with an adequate adjustment of the economy and financial markets. The Governing Board considers that given the monetary position that has already been reached and based on the evolution of the data, The increase in the reference rate at the next meeting may be of a lesser magnitude.d.