Interest Rate in Mexico

Overview

The monetary policy rate is an interest rate that the monetary authority (i.e., central bank) sets in order to influence the evolution of the main monetary variables in the economy. The policy interest rate determines the levels of the remainder of the interest rates in the economy, since it is the price at which private agents—mostly private banks—obtain money from the central bank.

The target for the overnight interbank interest rate is set by the Mexican Central Bank. The Central Bank meets eight times per year in order to decide on the level of the monetary policy rate. .

Mexico’s Monetary Policy

The Bank of Mexico (Banxico) is the autonomous monetary authority whose primary objective is to maintain the stability of the purchasing power of the national currency. Banxico adopted a monetary framework of inflation targeting after switching to a free-floating exchange rate regime in the wake of the economic crisis in 1994 and 1995. Starting 1999, Banxico began a gradual transition to the inflation target regime. This regime, which was officially announced in 2001, set the medium-term inflation target at 3.0% with a 1.0 percentage point variability range. The target range has not changed since then and no change is expected in the foreseeable future.

To ensure that inflation remains on a path consistent with the Central Bank’s medium-term target, the Bank conducts open market operations in the interbank market. Banxico’s main monetary policy instrument is the target of the overnight interbank interest rate (tasa de fondeo bancario). In January 2008, the Central Bank formally adopted the operating target for the overnight rate as a means to control liquidity in the market. When the Central Bank’s board of governors sets the target for the overnight interest rate, the decision acts as a signal for market participants to know the likely trajectory that interest rates will follow in the future. According to a programmed schedule, the governing board meets eight times per year to set the objective for the interest rate. The Bank’s decision leads to changes in other short-term interest rates as well as in prices for other types of assets (government or corporate bonds, interest rates to credit cards, mortgages), which affect households’ expenditure on consumption, sales, investment, production levels, wages, inflation expectations and, eventually, consumer prices.

In 2008, the Central Bank maintained the target of the overnight rate between 7.00% and 8.25%. However, in the first half of 2009, Banxico engaged in a cycle of aggressive monetary easing to improve credit conditions and stimulate the slowing economy against the background of the global financial crisis. The target rate was cut by 375 basis points from 8.25% to 4.50% during the first half of 2009, where it remained until March 2013. In March 2013, the rate was cut further to 4.00% and in October 2013 it was reduced further to 3.50%. In June 2014, the Central Bank lowered the monetary policy rate from 3.50% to 3.00%, which is the lowest rate on record.

Banxico is expected to maintain a dovish stance in the near-term in order to support weak economic growth. To this end, it will resist any short-term pressures to increase interest rates, even in the event that inflation breaches the 4.0% inflation target ceiling. In the longer-term, Banxico is likely to synchronize its tightening cycle with that of the United States Federal Reserve.

Base Lending Rates in Mexico

The base lending rates in the Mexican economy follow changes to the target of the overnight interbank interest rate set by the Central Bank. There are two main base interest rates: the 28-day Mexican Treasury certificate (certificado de tesoreria de la federacion [CETE]) and the equilibrium interbank interest rate (tasa de interes interbancaria de equilibrio [TIIE]). The CETE is a closely-watched interest rate and the TIIE is typically higher than the CETE, although the spread between them is less than 1.0 percentage point. The Central Bank determines the TIIE daily using quotations provided by at least six major credit institutions. The TIIE is preferred over the CETE as a base for lending rates, as it is hard to manipulate compared to the Treasury-bill auction. Moreover, Banxico calculates other rates to approximate bank funding costs and provide alternative base lending rates: the average percentage capture cost (costo porcentual promedio de captacion [CPP]) and the cost of capture of peso-denominated liabilities (costo de captacion a plazo de pasivos en moneda nacional [CCP]); both are calculated monthly.

When are Mexican Policy Interest Rate Data Released?

The Central Bank publishes interest rates data on a daily basis. According to a predefined schedule, the Bank meets eight times per year to announce the target for the overnight interbank interest rate. A detailed release calendar for the meetings is available on the Central Bank’s website.

Why is Mexico’s Monetary Policy Interest Rate Important?

Mexico is Latin America’s second largest economy after Brazil and tracking the decision of the target for the overnight interbank interest rate is important in order to determine if the Central Bank’s monetary policy is restrictive, accommodative or neutral. When the economy is growing fast and inflation is significantly higher, the Central Bank may use a restrictive monetary policy by raising the monetary policy rate in order to cool the economy and bring inflation down. Conversely, when economic growth is sluggish and inflation is subdued, the Central Bank may opt to apply an accommodative monetary policy by lowering the monetary policy rate in order to stimulate growth. Moreover, the impact of the monetary policy on investment is both direct and indirect. The direct impact is through the level or direction of the interest rate, while the indirect impact is through inflation expectations.

Where Can I Get Forecasts for Mexico’s Monetary Policy Rate?

Forecasts for Mexico’s inflation are elaborated by many sources. Banks, consultancies and think tanks closely monitor the monetary policy rate in Mexico and regularly update their estimates for the overnight interbank interest rate. FocusEconomics collects more than 30 different forecasts on Mexico’s monetary policy rate and provides an average (Consensus Forecast) from the economists surveyed. Together with the minimum and the maximum projections for the monetary policy rate in Mexico, you receive a comprehensive overview on Mexico’s future interest rates.

Forecasts for Mexico’s monetary policy rate are included in the monthly LatinFocus Consensus Forecast report for Mexico. All reports are available both on an ad-hoc basis and via an annual subscription (including optional Excel support). Download a free sample or purchase the report directly via our Online Store. The report is available immediately after purchase.