Interest rates and Banxico: why they move everything
The interest rate Banxico sets changes what your savings earn, what loans cost and what bonds and stocks are worth. Here's how it works.
The interest rate is the price of money: what it costs to borrow it and what you're paid to lend it. In Mexico, the benchmark is Banxico's target rate (the "overnight interbank interest rate"), which its Governing Board reviews on dates announced throughout the year.
Why Banxico moves the rate
Banxico's mandate is to preserve the currency's purchasing power: low, stable inflation, with a 3% target. If inflation rises, it can raise the rate: loans get more expensive, people and companies spend less and prices calm down. If inflation is under control and the economy weakens, it can lower it to boost spending.
How it affects you
| If Banxico raises the rate… | If Banxico lowers the rate… |
|---|---|
| CETES and accounts pay more | CETES and accounts pay less |
| New loans get more expensive | Loans get cheaper |
| Existing bonds fall in price | Existing bonds rise in price |
| Stocks tend to suffer (future money is worth less today) | Stocks tend to benefit |
| The peso tends to strengthen | The peso tends to weaken |
These are tendencies, not exact rules: the market moves on many things at once and often reacts earlier, when it expects Banxico to change the rate.
Why rates affect stocks
A company's value depends on the profits it will generate in the future. To know what those future profits are worth today, they're "discounted" at a rate. With high rates, future money is worth less today, and companies whose value depends on very distant profits (many growth tech companies) tend to be the most sensitive. Also, if CETES pay 10% with no risk, fewer people are willing to take stock market risk.
The Federal Reserve matters too
The U.S. Federal Reserve (the Fed) does the same for the dollar. Its decisions move markets worldwide, including the peso and the Mexican stock market. Banxico usually keeps its rate above the Fed's: that gap attracts investment into the peso.
The yield curve
There isn't just one rate: there's one for each term. The yield curve shows what bonds pay at 1 month, 1 year, 10 years, etc. Normally longer terms pay more. When short terms pay more than long ones (an inverted curve), it's usually read as the market expecting rates to fall, often because of a slowdown.
Test what you learned
1. If Banxico raises the interest rate, what usually happens to new CETES?
- They pay more
- They pay less
- They stop existing
Show the answer
They pay more. They adjust to the new reference rate.
2. Why do high rates tend to hurt stocks?
- Because they forbid buying stocks
- Because future money is worth less today and fixed income competes more
- Because companies stop selling
Show the answer
Because future money is worth less today and fixed income competes more. Future profits are discounted more and CETES become more attractive.
3. What does an inverted yield curve usually signal?
- That the market expects lower rates, often due to a slowdown
- That inflation is zero
- That bonds pay no coupon
Show the answer
That the market expects lower rates, often due to a slowdown. Short terms pay more than long ones.
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Everything in this section is educational: it explains how investing works, it doesn't tell you what to buy.