Banxico Deputy Governor Omar Mejía Castelazo said the central bank needs to reduce borrowing costs as higher rates could cause distortions in markets and the economy, he said in an interview with Larissa García of Market News International (MNI).
Mejia said that “it is necessary to adjust the level of restriction” and added that the central bank would reduce rates gradually as “the ongoing disinflationary process reduces the costs of restrictive monetary policy for the economy.”
Although Banxico’s mandate is set on price stability, Mejía shows signs of concern about economic activity. He said that “the risk of weak activity is already materializing. We have had three quarters with growth below projections. I had already seen this coming, which is why I voted against lowering interest rates in June.”
In the latest monetary policy decision, Banxico reduced the main reference rates by 25 basis points (bp) with a split decision of 3-2. Governor Rodríguez and Deputy Governors Galia Borja and Omar Mejía favored a cut, contrary to Deputy Governors Irene Espinosa and Jonathan Heath.
Most banking analysts estimate that Banxico will reduce interest rates by at least 50 basis points (bp) for the rest of 2024.
Asked about the upcoming September meeting, he said the bank is considering several factors, acknowledging that services inflation remains more persistent than expected. Mejia added that “some components of services inflation have shown greater persistence due to the lagged effects of pandemic-related shocks.”
Banxico FAQs
The Bank of Mexico, also known as Banxico, is the country’s central bank. Its mission is to preserve the value of Mexico’s currency, the Mexican Peso (MXN), and to set monetary policy. To do so, its primary goal is to maintain low and stable inflation within target levels (at or near its 3% target, the midpoint of a tolerance band of between 2% and 4%).
Banxico’s main tool for guiding monetary policy is setting interest rates. When inflation is above the target, the bank will try to control it by raising rates, making it more expensive for households and businesses to borrow money and thus cooling the economy. Higher interest rates are generally positive for the Mexican Peso (MXN), as they generate higher returns, making the country a more attractive place for investors. Conversely, lower interest rates tend to weaken the MXN. The rate differential with the Dollar, or how Banxico is expected to set interest rates compared to the US Federal Reserve (Fed), is a key factor.
Banxico meets eight times a year and its monetary policy is heavily influenced by decisions of the US Federal Reserve (Fed). Therefore, the central bank’s decision-making committee usually meets a week after the Federal Reserve. By doing so, Banxico reacts to and sometimes anticipates the monetary policy measures set by the Federal Reserve. For example, after the Covid-19 pandemic, before the Fed raised rates, Banxico did so first in an attempt to decrease the chances of a substantial depreciation of the Mexican Peso (MXN) and avoid capital outflows that could destabilize the country.
Source: Fx Street
I am Joshua Winder, a senior-level journalist and editor at World Stock Market. I specialize in covering news related to the stock market and economic trends. With more than 8 years of experience in this field, I have become an expert in financial reporting.
