Banxico keeps rates unchanged at 11.25% and anticipates that it will be necessary to leave them at this level for a prolonged period

He Banco de México (Banxico) has decided to keep its interest rates unchanged at 11.25% during their August meeting, as expected. This is the third consecutive meeting in which the entity does not change its rates after raising them 25 basis points last March from 11.0% to the current 11.25%.

Banxico’s monetary policy statement

Headline inflation continued to decline in most economies, although it remains at high levels. The underlying component has shown resistance to decline. Central banks of the main advanced economies, such as the United States Federal Reserve and the European Central Bank, raised their reference rates and highlighted a greater reliance on data to determine their future movements. Global growth prospects for 2023 continue to point to a slowdown, albeit slightly less than previously expected. Among the global risks, the prolongation of inflationary pressures, the worsening of geopolitical tensions, tighter financial conditions and, to a lesser extent, challenges to financial stability stand out.

In Mexico, since the previous monetary policy decision, the interest rates of government securities had had limited movements in all their terms and the exchange rate exhibited an appreciation. However, in the face of greater global risk aversion, in recent days longer-term interest rates and the exchange rate have shown some upward adjustment. Economic activity has shown resilience and higher-than-expected growth. The labor market continues to present strength. The balance of risks for growth is balanced.

D.ince the last monetary policy meeting, annual headline and subjacent inflation continued to fall. However, both remained high, standing in July at 4.79% and 6.64%., respectively. He non-core component continued at historically low levels, by being located in the same period at an atypical level of -0.67%. For 2023, inflation expectations have decreased. Those with a longer term remained relatively stable at levels above the target.

Headline inflation forecasts remained virtually unchanged. Those of core inflation adjusted marginally upwards in the short term. It follows anticipating that inflation converges to the target in the fourth quarter of 2024 . These forecasts are subject to risk. On the rise: i) persistence of core inflation at high levels; ii) exchange rate depreciation in the event of international financial volatility; iii) higher cost pressures; and iv) pressures on energy or agricultural prices. On the downside: i) a greater than anticipated slowdown in the global economy; ii) less transfer of some cost pressures; iii) that the appreciation of the exchange rate contributes more than anticipated to mitigate certain pressures on inflation; and iv) a greater than expected effect of the Federal Government’s measures in light of the shortage. It is considered that 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 distortion process. He considered that the disinflation process continued advancing due to the mitigation of various pressures. However, he judged that they continue to affect inflation, so that it remains high. In addition, he was of the opinion that the inflationary panorama continues to be very complex. Based on the foregoing and taking into account the monetary position already reached, the Governing Board, with the presence of all its members, unanimously decided to maintain the target for the Overnight Interbank Interest Rate at 11.25%. With this decision, the monetary policy stance remains on the trajectory required to achieve the convergence of inflation to its target of 3% 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. It estimates that the inflation outlook will be complicated and uncertain throughout the entire forecast horizon, with upward risks. Given this, in order to achieve the orderly and sustained convergence of headline inflation to the 3% target, it considers that it will be necessary to maintain the reference rate at its current level for an extended period. The central bank reaffirms its commitment to its priority mandate and the need to persevere in its efforts to consolidate a low and stable inflation environment.