Mexico’s central bank raises interest rates to 4.25% per year

RIO DE JANEIRO, BRAZIL – Mexico’s central bank (Banxico) raised the economy’s basic interest rate by 25 basis points, to 4.25% per year, in a decision announced on Thursday. Two members of the monetary policy committee voted to maintain the interest rate at 4%.

According to the statement issued by the institution, the supply chains and production processes of various goods and services continue to be affected by the pandemic, which has generated additional shocks to full inflation and core inflation, which reached 6.02% and 4.58% in the first half of June.

“Expectations for inflation in 2021 rose again, and those for the medium and long term remained relatively stable at levels above the 3% target,” the document says.

While the Mexican Central Bank acknowledges that the pressures are mostly temporary, the upward price dynamics pose a risk, which suggested an increase in the interest rate to contain inflation expectations.

“Although the shocks that have affected inflation are expected to be transitory, due to their diversity, magnitude and the extended horizon over which they have affected inflation, they may represent a risk to the price formation process,” says the statement from Mexico’s Central Bank.

“In this context, it was considered necessary to strengthen the monetary stance to avoid effects on inflation expectations, as well as to achieve an orderly adjustment of relative prices and promote the convergence of inflation to the 3% target,” the institution argues.

Also, according to Banxico, the conduct of monetary policy will depend on “the evolution of factors affecting inflation, their expected trajectories over the projection horizon and expectations.