Banxico reduces its interest rates to 4% from the previous 4.25%

The Central Bank of Mexico (Banxico) today announced a rate cut of 25 basis points, as expected. Rates now stand at 4% compared to 4.25% previously, its lowest level since mid-2016.

Banxico statement

Global economic activity continued to recover at a more moderate and heterogeneous pace across countries and sectors. Global financial markets have shown a positive behavior in anticipation of a major fiscal stimulus package in the United States. Inflation in advanced economies remains below the targets of their respective central banks, which reiterated their intention to maintain accommodative monetary stances for a prolonged period. Among the global risks persist the increase in infections, delays in the production and distribution of vaccines, the sufficiency of fiscal stimuli and other tensions.

Since December, the Mexican peso and interest rates have operated in limited ranges. The economic activity in Mexico improved during the fourth quarter at a slightly higher rate than expected, although it remains below pre-pandemic levels, in an uncertain environment and with downside risks. Wide slack conditions are anticipated throughout the horizon in which monetary policy operates.

Annual headline inflation fell from 4.09% in October, its highest level in 2020, to 3.54% in January 2021, while the underlying decreased from 3.98% to 3.84%. The pandemic has implied significant changes in relative prices, pushing up merchandise inflation and downward inflation for services, which in January registered 5.41% and 2.13%, respectively. Expectations for headline inflation for the end of 2021 increased slightly and those for the medium and long term remained stable at levels above the 3% target.

The expected trajectories for headline and core inflation in the forecast horizon are similar to those forecast in the last Quarterly Report. Increases in headline inflation are anticipated in the second quarter of the year mainly associated with the arithmetic effects of the reduction in energy prices last year, and a downward trend from the second half of the year. Also, core inflation is expected to be around 3% from the third quarter of this year. Said provisions are subject to short and medium-term risks. On the downside: i) a greater than expected effect due to the negative product gap or greater measures of social distancing; ii) lower global inflationary pressures; and iii) exchange rate appreciation. Upward: i) pressures on core inflation due to the recomposition of spending; ii) episodes of exchange rate depreciation; and iii) various cost pressures for companies. The balance of risks of the expected path for inflation is uncertain.

The risks to which inflation, economic activity and financial markets are subject pose significant challenges for monetary policy and the economy. In this regard, it is necessary to promote an orderly adjustment that allows a change in relative prices without affecting the price formation process and inflation expectations. Considering that recent information allows an adjustment in the monetary stance, keeping inflation forecasts in line with the convergent path towards the 3% goal, with the presence of all its members, the Governing Board unanimously decided to reduce by 25 points base the objective for the overnight Interbank Interest Rate at a level of 4.00%. Going forward, the conduct of monetary policy will depend on the evolution of the factors that affect headline and core inflation, in their predicted trajectories in the forecast horizon and in their expectations.

The Governing Board will take the necessary actions based on the additional information, so that the reference rate is consistent with the orderly and sustained convergence of general inflation to the target of 3% in the period in which the policy operates. monetary. It is necessary to safeguard the institutional sphere, strengthen the macroeconomic foundations and adopt the necessary actions in the monetary and fiscal spheres, to promote a better adjustment of the national financial markets and of the economy as a whole.