A group of people walk in front of the Bank of Mexico headquarters in Mexico City. Alejandro Cegarra (Bloomberg)
The slowdown in inflation has not been enough to meet the Bank of Mexico’s target, so the monetary authority decided on Thursday to keep the reference interest rate unchanged at 11.25%, the highest level since the current monetary policy came into force. While market shocks caused by the Covid-19 pandemic and the war in Ukraine have been mitigated, other upside risks to the cost of living remain in Mexico, including possible currency devaluation and commodity prices.
“Since the last monetary policy meeting, annual headline and core inflation have continued to decline. However, both remained high, at 4.44% and 5.78%, respectively, in the first half of September, the Bank of Mexico said in a statement on Thursday. The specialists on the bank’s board of directors also adjusted their inflation expectations so that they postponed a decline towards the target range until mid-2025.
They warned that their forecasts were fraught with risks. Upside risks include possible exchange rate depreciation “in light of international financial volatility events,” higher costs, strong economic performance and pressure on energy or agricultural prices. On the other hand, there is a potentially stronger-than-expected slowdown in the global economy, lower costs and an appreciation of the exchange rate. “The risk balance is expected to continue to trend upwards with respect to expected inflation developments over the forecast period,” the statement said.
The reason the central bank raised the interest rate was to contain inflation after the pandemic, which reached 8.7% in September last year. A combination of factors, including monetary policy, have managed to bring inflation down, but it remains above the central authority’s target range, which is between 2% and 4%. According to the National Institute of Statistics and Geography (Inegi), inflation in the country was 4.64% year-on-year in August, representing a seven-month slowdown. The monthly increase was 0.55%.
Monetary policy has its limits and cannot, for example, influence the price increase caused by organized crime, which some economists estimate at two percentage points.
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