How Mexico's Central Bank Keeps the Peso in Check

Recently, the global economic landscape has been marked by significant uncertainty. Factors like Brexit, the US-China trade conflict, and the COVID-19 pandemic have created a challenging environment for central banks worldwide. Mexico is no exception, and the country's central bank, Banco de México, has been diligently navigating these turbulent waters.

The Deputy Governor of Banco de México, Galia Borja Gómez, shed light on the role of central banking in times of financial uncertainty during a recent conference. In this article, we explore her insights and the central bank's commitment to maintaining low and stable inflation, as well as the implications for businesses and economic development.

Deputy Governor Galia Borja Gómez emphasized the critical role of low and stable inflation in promoting economic development and the welfare of the population. Inflation, the rise in the general level of prices over time, impacts not only the cost of living for individuals but also the broader economic landscape. When inflation is high and volatile, it erodes the purchasing power of consumers, making it challenging for businesses to plan and invest for the long term.

Banco de México's primary objective, as outlined in Article 28 of the Constitution, is to ensure the stability of the national currency's purchasing power. The central bank plays a pivotal role in achieving this goal by managing the overnight interbank interest rate. This rate influences the behavior of other interest rates in the economy, ultimately affecting consumption, production, economic activity, and inflation.

Deputy Governor Borja Gómez highlighted that Banco de México gained autonomy in 1994. This autonomy allowed the central bank to implement a more adaptable exchange rate, subsequently adopting inflation targeting in 1999. In 2003, the official target of 3 percent inflation was established. This transition to an inflation targeting regime represented a flexible approach that adapted to Mexico's changing economic landscape over the years.

Meeting the Institution's Objectives

Meeting Banco de México's objectives is crucial for protecting the purchasing power of the national currency, especially for lower-income households. It also fosters an environment conducive to medium and long-term planning, contributes to the efficient allocation of resources, and supports the development of the financial system. In other words, by maintaining low and stable inflation, the central bank helps create a stable economic environment that benefits businesses and the population at large.

Borja Gómez discussed the central bank's commitment to promoting an orderly adjustment of relative prices, financial markets, and the overall economy. This approach aims to steer inflation towards its target and preserve the anchoring of inflation expectations. Banco de México will remain vigilant in monitoring inflationary pressures and the factors influencing its trajectory.

As Mexico faces an ever-changing global economic landscape marked by uncertainty, the role of Banco de México remains vital in preserving economic stability. Deputy Governor Galia Borja Gómez's insights underscore the importance of maintaining low and stable inflation, which benefits the general population and provides a conducive environment for businesses and economic development.

The central bank's autonomy, its commitment to inflation targets, and its adaptability in the face of changing circumstances make it a reliable guardian of Mexico's economic well-being. Business leaders and policymakers should take heed of the central bank's efforts to ensure a brighter and more stable economic future for Mexico.