Mexico raises key interest rate to 8.5%, highest in 16 years

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A man shops for vegetables at a market in Mexico City, Tuesday, Aug. 9, 2022. Mexico's annual inflation rate rose to 8.15% in July, driven largely by the rising price of food, according to government data released Tuesday. (AP Photo/Fernando Llano) (ASSOCIATED PRESS)

MEXICO CITY (AP) — Mexico’s central bank has raised its interbank interest rate by 0.75% to 8.5% Thursday — the highest level in the 16 years since comparable bank policies went into effect.

The Bank of Mexico cited continuing inflationary pressures, and predicted inflation would peak at 8.5% in the third quarter.

“Inflationary pressures derived from the pandemic and the war (in Ukraine) continue to affect general and underlying inflation,” the central bank said in a statement.

Authorities did not rule out future rate increases, and Intercam bank said in an analysis report that interest rates could hit 10% or more, depending on inflation.

“The most prudent thing is to expect interest rates in Mexico to end 2022 at levels of around 9.5%, with increasing probabilities of prime interest rates of 10% or more if inflation does not decline,” the Intercam report said.

Mexico’s annualized inflation rate hit 8.15% in July, the highest in more than two decades.

The Mexican peso gained ground against the dollar before the widely expected move to increase rates. The peso closed below 20 to $1, at 19.96. Banco Base noted the peso has racked up a 2.19% gain against the dollar over the last four sessions.

The Bank of Mexico predicted that inflation would decline to 7.1% by the first quarter of 2023 and 3.1% by the first quarter of 2024. The central bank's inflation target is 3%.

Francisco Cervantes Díaz, the head of Mexico's Business Coordinating Council, wrote of the rate hike, “this was expected, to fight volatility and high prices in some sectors. The good news is that inflation is expected to close 2023 at 3.2%.”