The decline of Mexico’s central bank, explained
Banxico’s governors have always been political. What’s happening to it today is worse than politics.
After decades of currency crises, Banxico, as the Mexican central bank is known, has one main job: to maintain the value of the peso. One of the tools in its toolkit is the setting of the country’s baseline interest rate. It is the benchmark from which other financial institutions take their queue to set their own rates, from credit card interest to the country’s sovereign bonds.
For reference, the Federal Reserve of the United States usually sets its baseline interest rate at about half that of Mexico’s. The difference is a matter of economic realism. Among other reasons, Mexico is seen as a riskier market so, Banxico sets its rates higher to entice creditors with higher returns to take the leap and lend more. In more stable economic times, it is best to bring interest down to entice borrowers with lower rates in order for them to take out loans—for a new car or the expansion of a factory.
It is a fine balance, so Banxico makes tweaks eight times a year to respond to the state of the national and global economies. The pandemic depressed consumption, so rates came down to boost borrowing and therefore keep economic growth up. The post-pandemic supply chain crisis interrupted the provision of critical components, like semiconductors, driving up prices, so Banxico put interest rates up to dissuade anyone with a credit card from driving prices up further by buying that extra laptop.
Over the past few years, Banxico has been on a mission to lower its baseline interest rate from highs of 11.5% to closer to its target rate of about 3%. They want to get people and businesses borrowing again to get Mexico’s stagnating economy growing. And then came the war in Iran.
Among conflicting rumours about how long the closure of the Strait of Hormuz would go on for or how big the oil shock would be, most central banks opted for caution. The US Fed and the Bank of England kept their rates unchanged. Banxico lowered its own.
By the size of the reaction to this decision, one might think the Mexican central bank had made a massive cut. In reality, it was a relatively mild one—from 7% to 6.75%. Nevertheless, the decision was seen by many as not only the wrong one given the situation, but as evidence that the central bank had lost its autonomy, succumbing to political pressures. (Purportedly because lower rates would keep money flowing into the Mexican economy even if it risked pushing inflation up).
Both sides of the debate blamed politics. Supporters of the ruling Morena party accused the opposition of sabotage; anti-government types accused the Banxico’s Board of Governors of politically motivated malfeasance.
Speak to professional economists steeped in monetary policy—as The Mexico Political Economist did for this report—and the debate is markedly different. According to economists in Banxico and outside of it, as well as to those for and against the government, there is a problem with the Mexican central bank. It’s just not one connected to this one decision or even to day-to-day party politics—it’s much worse.
