Banxico: Bank of Mexico would cut key rate to 5%

23/06/2020

The Bank of Mexico (Banxico) will cut the reference interest rate by 50 basis points to 5%, which would mean its lowest level since September 2016 and its ninth consecutive cut.

Bank of Mexico: According to specialists, Banxico will once again cut interest rates in its monetary policy.
Bank of Mexico: According to specialists, Banxico will once again cut interest rates in its monetary policy.

According to a survey of 27 bank analysts by Reuters, this Thursday the central bank will make a new cut in its monetary policy announcement, because of the weak outlook of the Mexican economy due to the coronavirus pandemic (Covid-19).

Also, by the end of this year, the rate would be at 4.50%, according to median projections, compared to 4.75% of the previous survey conducted in May 2020.

It should be remembered that in the fifth month of the year Banxico reduced the rate by 50 basis points to 5.50% and anticipated that during the second quarter the effects on economic activities due to the pandemic would be deeper.

For the end of the year, some specialists say that the Mexican economy will suffer a fall of up to 10%, which would add to the contraction of 1% suffered in 2019. During April, industrial activity recorded a historic fall driven mainly by a negative performance of the construction and manufacturing sectors.

Finally, year-on-year inflation in May was below Banxico's official target of 3%, giving room for further cuts in the reference rate.

25 years of autonomy and advocacy of Banxico

The Mexican Constitution requires the central bank to have as its main objective the preservation of the value of the currency.

This year, the Bank of Mexico (Banxico) celebrates 25 years of being an autonomous institution; that is, it cannot be forced to lend money to the government, and no authority can order it to provide credit.

Such is the essence of the autonomy conquered by the central institute with the reform of Article 28 of the Constitution in 1993, which came into force on April 1, 1994.

Being autonomous implies that it determines the policies and instruments to achieve its priority objective, which is to maintain price stability, as well as to perform its other functions.

Thus, if the government comes to have a money problem, not even the President of the Republic can demand that the central bank bail him out or request support to finance public spending.

The Mexican Constitution orders the central bank to have as its main objective to preserve the value of the currency; that is to say, to combat inflation so that consumer prices do not nullify the value of workers' salaries.

The Bank of Mexico has two other secondary objectives, which are to promote a healthy financial system and the proper functioning of the payment system.

In addition, it has budgetary and management independence, because by administering the country's international reserves, which amount to nearly 179 billion dollars, it obtains returns on the investments of these assets.

To fulfill its primary mandate, it was proposed as a punctual goal that inflation should not exceed a level of 3%, with a range of variability of plus/minus one percentage point. Since January 1999, Banxico adopted the inflation targeting strategy as a mechanism to improve communication with the public and strengthen credibility in the central bank.

If it deviates from this target, it has to react to prevent the purchasing power of Mexicans from deteriorating, as inflation is considered a tax that affects lower income earners.

To combat inflation, Banxico has as an instrument of monetary policy the reference rate, which serves to put a cost to money.

If the rate rises, the cost of money via credit and financing becomes more expensive. In addition, being an autonomous bank, no one can ask you to raise or lower the rate in order to stimulate or contract the economy.

As a central bank, it is responsible for providing money to the economy, for which it has two note factories, and has the power to order the Casa de Moneda de México to mint the cash.

In addition, the central bank has the exclusive power to place notes and coins among the public. The issue of banknotes and coins is made according to the demand of society.

Hence, no one can order or ask you to issue more paper money or notes that are required.

Board of Governors

Before obtaining its autonomy, the Bank of Mexico was headed by a general director who was directly appointed by the chief executive in turn.

Today it is headed by a governor and decisions are made collegially through a governing board made up of five members: the governor, who has a casting vote, and there are four deputy governors. Together, the five members are responsible for conducting monetary policy.

While all members of the governing board are appointed by the federal executive, the Senate of the Republic must ratify the appointments. They are appointed in such a way that they are not in function of the political cycles, and they must meet certain requirements to occupy the positions.