Economics: Banxico increases interest rate to 4.25% in bid to control inflation

MEXICO - Report 28 Jun 2021 by Mauricio González and Francisco González

On Thursday, Banxico increased the interest rate by 25 basis points to 4.25%, surprising the market, which generally expected it to remain unchanged as part of a temporary pause following 12 consecutive rate declines since August 2019. The change in the benchmark rate reflects Banxico's intention to seek to control inflation in accordance with its mandate. The decision is projected to have a positive effect in terms of reducing the uptrend in inflation expectations, which were beginning to affect prices in the short term.

The uptrend in both inflation and inflation expectations for 2021-2022 is very clear. Indeed, during this past week, CPI figures for the first two weeks of June were released, which showed a 6.02% annual increase in headline inflation and a 4.58% rise in core inflation.

Most of the items that have pressured the CPI since April 2020 continued at high levels. Thus, the sub-indexes with the highest inflationary impact in the period were food and livestock products, beverages and tobacco; non-food merchandise, as well as energy products.

Headline and core inflation expectations for the whole of 2021 increased again during the month, at over 5.0%, and with a convergence to the 3% target expected to be achieved over a longer period of time (the third quarter of 2022 vs. a previously estimated second quarter). By the same token, Banxico expects core inflation to remain at high levels until the first half of 2022.

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