The Board of Governors of the Bank of Mexico (Banxico) made its second adjustment of the year to monetary policy, in which it increased its benchmark rate by 25 basis points to 6.50%.
Banxico’s announcement is in line with market estimates, which envisaged this increase. This level of interest rates had not been seen since April 2009, when the country faced a financial crisis brought on by the collapse of US junk bonds.
With regard to inflation, Banxico recalled that it has continued to rise, standing at 5.29% during the first half of March – mainly due to the impact of rising energy prices – and expects to maintain that trend during the year and yield to the end Of 2018, when it expects to reach 3%, within a range in which the bank feels more comfortable.
The objective rate of Banxico sets the interest to be paid on short-term loans, i.e the cost of money provided by banks. This measure is one of the tools that the institution has to control inflation, the main mandate of the Mexican central bank.
As the rate rises, credits, consumption and physical investments are discouraged, but it drives savings, in addition, foreign capital sees our country more attractive to the payment of higher interest rates and this avoids further depreciation of the peso due to the flight of Capitals.
During 2016, the institution ruled by Agustín Carstens raised its interest rate five times in its attempt to control the exchange rate and avoid a transfer to its inflation target. The most recent move, and the first in 2017, was on February 9, when it raised its interest rate by 50 basis points to 6.25%.