Navigating Mexico: Interest Rates Never Looked So Good
By JUAN DE JESÚS BREENE
Somebody recently asked me where they could get a certificate of deposit (CD) in Mexico.
The short answer, I told them, is at any bank.
The longer answer, however, is a little more complicated.
CETES, the acronym in Spanish for Mexico’s Federal Treasury Certificates, are auctioned every Tuesday by the Central Bank of Mexico (Banxico) for that week.
CETES, the oldest government-backed and traded commodity in the country, started in 1978.
The official rate is set by Banxico every few months, just as the Federal Reserve does in the United States.
This current historic high of 11 percent for a two-month CETE was announced on Feb. 9, and the next scheduled hike is set for March 30.
So yes, for those who have forgotten seventh-grade math, when we learned compound interests, if you had 5 million pesos to invest tomorrow, you would be earning about 90,000 pesos on a 60-day investment.
Would 45,000 pesos a month work for your monthly living expenses in Mexico? For most of us, of course it would.
For a longer investment — six months, for example — you can get even higher than 11 percent.
Any bank will be your broker, since most of us would not know how to bid directly.
Obviously the banks set their own percentage on the amount you sink in, with the corresponding rates for 28, 60 or 90 days. They even have a daily rate.
And yes, you can use online services such as cetesdirecto, but I do not know if they are insured the way banks are, but surely they work fine for smaller investments. They also give the highest rates when compared to a brick-and-mortar bank.
Like everything else in Mexico, the interest earned is pretaxed, so the Treasury Secretariat (Hacienda) already has its share of your interest income. You will likely get some of it back on your annual declaration.
On the flip side, those who are trying to secure a mortgage loan or are facing credit card debt are paying horrific monthly interest rates in Mexico.
How does all of this supposedly control inflation? Well, almost all businesses must secure monthly bridge loans to purchase their inventory. They are also paying these hefty interest rates and passing the cost on each time you open your pocketbook.
Banxico has been particularly bullish over the last two years, hiking its benchmark rate by 650 basis points during the current hiking cycle, which began in June 2021, in an effort to curb inflation.
If Mexican inflation does eventually slow, most analysts predict that the benchmark rate will eventually drop again.
At least that is how it is supposed to work.
So the magical question is, when will Banxico stop raising its rate?
It is hard to say, since both global economics and national politics play a role in how the Central Bank will behave.
Last month, Fitch Ratings said that persistent inflationary pressures on a global level will not leave room for most central banks to cut their benchmark interest rate this year.
Notwithstanding, the responses of central banks are difficult to predict, especially given the volatile global political climate.
Add to this the fact that labor markets could still remain unexpectedly resilient, while the return of the Chinese consumer to the global economy could trigger a renewed upward pressure on commodity prices, leading to a scenario of higher rates, longer highs and deeper or longer recessions.
“This exacerbates the macroeconomic and political pressures of higher costs of living, higher capital costs and tensions between monetary and economic policies, all of which would raise the risks of deeper recessions and delayed recoveries,” Fitch said.
In Mexico, Fitch predicted that Banxico will have to continue raising rates, since the fight against inflation is still far from over.
For the next couple of months, I believe it is a sure bet to put every peso possible into a CETE, and if you can swing six months or more, go for it.
My guess is that we won’t be seeing rates like this again for a while … or maybe we will.