Bank of Mexico prioritizes inflation control

Mexico's monetary policy is too aggressive to combat inflation, and the rules followed by the Bank of Mexico (Banxico) to achieve this have negative impacts on the rest of the economy, specifically on employment, said César Duarte Rivera, an expert from UNAM's Institute of Economic Research.

"At many times, it seems that employment is being sacrificed to control prices, and I wonder which is worse: having to pay 10 percent more for your products or services, or losing your job. That would be my criticism of Mexican monetary policy, "he said.

When the Bank of Mexico increases the interest rate, which is the way they try to control prices, the corresponding credit cards, mortgages, cars, or goods credits go up, also for companies. "Then a company that needs credit to open a new factory or to continue operating, has to pay more, and that decreases its production volumes; less is produced, and that implies fewer workers; the whole economy is depressed," he warned.

This economic depression is especially serious in the current context because it goes hand in hand with production and gross domestic product. The problem is deep-rooted because in the 1990s (with Carlos Salinas de Gortari), a constitutional reform was made to Banxico, and it was established that its objective was price stability. It's not the Bank of Mexico's directors' fault, but by law, their job is to keep things stable and keep inflation in check.

The problem is that before this modification, the Bank of Mexico's job was economic development. Central banks have some capacity to increase employment and improve production. "However, it has been decided to forget all that part and focus solely on price control," he said.

Economists must look beyond monetary policy, which is not everything. There are other mechanisms to control inflation without considering them, such as controlling prices and agreeing with the sectors to keep them stable.

Inflation during this six-year term has increased, said the university professor, because it does not depend on the internal conditions of the Mexican economy. The main causes are external, due to the pandemic effect, the global production chains that are still at a standstill, and the shortage of inputs.

"For example, to produce an automobile, one part comes from Taiwan, another from Brazil, and yet another from Germany. And what was working well until before the pandemic, stopped with the health contingency, and these chains are just now recovering. The car that used to be produced quickly now takes longer, there are fewer cars on the market and, therefore, they are more expensive.

Added to this is Russia's war with Ukraine, which has hindered trade channels in that region and caused the price of energy (due to the blockade in the region) to increase. "From many sides, there is pressure for price increases. The inflationary phenomenon we are experiencing is not exclusive to Mexico; in fact, the United States has higher rates than we do today. "There is inflation in Europe and practically all over the world, so despite national measures, it is not something that is under the control of Mexican authorities," he said.

According to Duarte Rivera, the U.S. Federal Reserve's rates mark a guide for those imposed in Mexico to follow the same path.

"They also affect international investors, who will receive compensation for buying a bond (from the U.S. Treasury or Cetes in Mexico). If the rate paid by both is the same, they will most likely buy the U.S. ones because there is greater security and they pay in dollars.

As a result, if interest rates rise in the neighboring country to the north while remaining unchanged in Mexico, a large amount of capital invested in Mexico will flow to the US, potentially causing problems with the number of reserves held by the Bank of Mexico and resulting in a depreciation of the peso. "That is what we are trying to avoid," he said.

It is difficult for Banxico not to respond to the increase in interest rates in the United States with a similar increase because, unlike the United States, which does not have to worry about its exchange rate because the international currency is the dollar, for us that is important, said the expert.

The economist considered that global production chains are currently being re-established, and this may help to reduce the pressure on price increases.

Bank of Mexico raises the interest rate to 9.25% in the face of persistent inflation

The Bank of Mexico (Banxico) increased its interest rate by 75 basis points on Thursday to combat rising inflation levels and in response to a similar increase in U.S. Federal Reserve (Fed) borrowing costs the previous week. To market forecasts, the Banxico Board of Governors increased the overnight interest rate goal to 9.25% in a unanimous vote. In its announcement, Banxico increased its inflation projections for Mexico and pushed back to the third quarter of 2024 its forecast for inflation to reach the official objective of 3%. Previously, the anticipated convergence date was the first quarter of 2024.

Why is Banxico increasing its interest rate?

With the hike in interest rates, Banxico intends to discourage consumption, i.e., to dissuade us from spending too much to control inflation. This suggests that banks will increase the interest rates on the loans they offer. Since increases are not immediate and vary by a financial institution, it is advisable to contact your bank.

How does the increase in interest rates impact Mexicans?

If you just make the minimum payments, you will pay more for a personal loan or credit card use the higher the interest rate. Similarly, the same occurs when purchasing a vehicle on credit or obtaining a home loan. In these instances, if your credit is at a variable rate, your monthly payments will increase, however, if your credit is at a fixed rate, your monthly payments will not change as long as you remain current on your payments. Before receiving a loan, it is prudent to determine whether the interest rate is fixed or variable. In contrast, if you have savings or investments, the increase in the interest rate by the Bank of Mexico (Banxico) is beneficial, as it will enhance the returns you will receive on your money.