On Thursday, March 21, the Bank of Mexico (Banxico) announced a key interest rate cut, its first in three years.
This decision comes as the country experiences a deflationary phase yet faces persistent inflation risks.
The Governing Board, consisting of five members, agreed to lower the overnight interbank interest rate by 25 basis points to 11.0 percent, starting March 22, 2024.
Banxico shared, “The Board’s future decisions will depend on the data available at upcoming meetings.”
They also noted the continued evaluation of the restrictive monetary policy’s effect on inflation.
Future rate changes will target a steady return of inflation to the 3.0 percent goal by the second quarter of 2025.
As of February, Mexico’s yearly inflation was 4.40 percent. Banxico warns, though, that inflation risks lean towards increasing.
It emphasized steady, careful monetary policy is essential.
Banxico pointed out risks like growing geopolitical conflicts, enduring inflationary pressures, tighter financial settings, and some financial stability issues.
The last time Banxico cut the credit cost was on February 11, 2021, to 4.0 percent.
Since then, it has raised the rate to 11.25 percent due to rising inflation from the global coronavirus impact.
Background
Mexico’s economy might grow by 2.4 percent in 2024. Yet, it faces hurdles from the finances of Petróleos Mexicanos (Pemex) and severe droughts.
This comes from a Tuesday alert by the Mexican Institute of Finance Executives (IMEF).
José Domingo Figueroa, the president of the IMEF, shared insights during a monthly review and praised Mexico’s vibrant service industry.
However, he mentioned a slowdown in manufacturing. This slowdown ties back to the U.S.’s tight monetary policy.
Despite high oil prices, Pemex’s recent numbers show falling cash flows. This is troubling, even with federal aid.
Without financial improvement, Pemex will need more government support. Figueroa warned that this scenario could strain Mexico’s budget.
Droughts are another issue. This year’s droughts have hurt crop yields, which could push up demand and prices for goods.