For many central bankers and economists in the Eurozone, the monetary policy cocktail mixed by the European Central Bank (ECB) last Thursday is considered to be too high-proof. They fear that the tenth consecutive interest rate hike – reaching 4.5% – might not bode well for the faltering economy in some Eurozone countries. However, they may overlook the fact that the primary mission of the ECB is not to stimulate economic growth, but to ensure price stability. It was evident to all that the consequences of withdrawing from the excessively expansive monetary policy, which had been in place for an extended period, would be more challenging the longer and more hesitant the central bank was in executing its policy shift. With an inflation rate in the Eurozone at 5.3% and consumer inflation expectations for 2024 still at 3.4%, one cannot yet label a 4.5% policy rate as a genuinely restrictive monetary policy. The real interest rate remains negative, and the ECB's balance sheet, inflated by bond purchases, is unlikely to be significantly reduced. Furthermore, a pause in interest rate hikes, expected or hoped for by many, could raise doubts about the ECB's determination to continue fighting inflation until it reaches its 2% target.

Learning how to take decisive monetary policy actions to stay ahead of the curve instead of chasing after the data could have been studied by ECB President Christine Lagarde and her board in Mexico. Following the pandemic, when inflation soared, Banco de Mexico (Banxico) wasted no time and initiated a rapid cycle of interest rate hikes. Since June 2021, they have raised the Mexican policy rate (overnight interbank rate) in 15 significant steps by 725 basis points from 4% to 11.25%. Mexico's central bank governor, Victoria Rodriguez Ceja, didn't hesitate to continue raising rates even when the policy rate had exceeded the inflation rate, and the real interest rate became positive – a point that the ECB has not yet reached.

Banxico's approach shows that taking swift action can also allow for an earlier pause in interest rate hikes as its most recent interest rate move dates back to March 30, 2023. Another rate hike has not been on the table in Mexico since then, despite the booming economy and the central bank's recent upward revision of its growth forecast to 3.0%. The reason for this is that the inflation rate (CPI) has steadily decreased from its peak of 8.7% in September 2022, when the policy rate exceeded the inflation rate, to 4.6% in August 2023. According to the central bank's latest report, the inflation target of "3% plus/minus 1%" could be achieved by the end of next year. Banxico, with its highly restrictive stance, has managed not only to lower inflation but also to significantly reduce inflation expectations following the inflation shock. Now, they are even triggering a fiesta vibe. Mexican savers are currently enjoying a real interest rate of more than 6%. Along with other factors such as attractive location conditions and the "nearshoring" trend resulting from geopolitical tensions between the USA and China, the positive real interest rate has increasingly attracted foreign capital to the largest Latin American economy after Brazil.

The resulting 10% appreciation of the Peso, its national currency, against the US Dollar since the beginning of 2023, following a 5% increase in 2022, has not harmed Mexico's export sector. The Peso's strength is seen by investors as a sign of the economy's potency and stability. They trust that Banxico has learned from the 1994 crash, also known as the Tequila crisis, and will not hesitate to employ "high-proof" measures in monetary policy if needed. A bit more tequila might also benefit the ECB's monetary policy cocktail.