Banxico meets expectations and raises its interest rates 25 basis points to 11.25%

The Governing Board of the Bank of Mexico He decided increase by 25 basis points (bp) the target for the Overnight Interbank Interest Rate at a level of 11.25%, with effect from March 31, 2023. This is the fifteenth consecutive rate hike carried out by the entity, this increase also being the smallest since November 2021, since since then there have been six increases of 50 bp and four of 75 bp. This level represents the new all-time high recorded since the country began its current monetary policy in 2008.

Banxico Monetary Policy Statement

Global inflation remains at high levels, although general inflation continued to decline in a large number of economies. The underlying component showed persistence. Turbulence was recently observed in international financial markets due to greater risk aversion in the face of events in the US and European banking systems. The financial authorities have implemented actions such as the expansion of deposit protection and the provision of liquidity, to maintain confidence in the financial system. Most central banks, including the US Federal Reserve, continued to increase their reference rates. Growth prospects for 2023 point to a slowdown. Among the global risks, the prolongation of inflationary pressures, the worsening of geopolitical tensions, tighter financial conditions and challenges to financial stability stand out.

Since the last decision, interest rates in Mexico presented generalized increases. The Mexican peso, after exhibiting an appreciation, recently registered volatility due to the greater aversion to risk. The difficulties faced by certain banking institutions in the United States and Europe have had a limited impact on the national financial system. Banks in Mexico comfortably comply with regulatory liquidity and capitalization requirements. Banco de México will remain attentive to the evolution of events in international financial markets and any possible impact on the local financial system.. National economic activity has shown resilience in the face of a complex external environment and in early 2023 it continued to grow at a moderate pace. He labor market shows strengthto.

Since the last monetary policy meeting, annual headline inflation has fallen more than expected. This is due to the evolution of the non-core component. Core inflation has gradually adjusted downward. In the first half of March, headline inflation stood at 7.12% and core inflation at 8.15%. For 2023 and 2024, inflation expectations increased again, while longer-term ones remained relatively stable.

The forecasts for headline and core inflation were adjusted marginally, although they maintain a stable trajectory. Inflation is still expected to converge 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) a decrease in the intensity of the geopolitical conflict or a better functioning of the supply chains; 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 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. Based on the foregoing, and with the presence of all its members, it unanimously decided to increase the target for the Overnight Interbank Interest Rate by 25 base points to a level of 11.25%. With this action, the rate of increases is reduced and the monetary policy stance adjusts to the trajectory required for inflation to converge 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. 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 will make its next decision based on the inflationary outlook, considering the monetary position already achieved.