MexECON Blog

Central Bank Holds Rates at 4.50 Percent

Banco de México decided today to keep its benchmark interest rate unchanged at 4.50%, precisely where it has been since July 2009.  In their statement, the policymakers noted world economic growth is expected to moderate in 2011, in part because U.S. consumers are still trying to reduce debt.  The policymakers said Mexican exports and industrial production continue to rise at an "elevated" rate, but they warned that their growth rate could be affected by slowing activity in the United States.  Meanwhile, the policymakers saw Mexican consumer spending rising at only a slow rate.  They also said Mexican investment is showing only sporadic increases.  The policymakers discussed how strong inflows of capital from abroad are driving up the value of the peso, but at the same time, those flows are lowering Mexican interest rates, while the stronger peso and continuing slack in the economy are helping to bring down inflation.  Even though Mexican inflation has recently been coming in lower than expected, the policymakers said price increases would likely accelerate again toward the end of 2010 before resuming their downward trend next year.  The policymakers reiterated their goal to bring inflation down to 3.0% by the end of 2011.

Comment:  Even though Mexico's overall economic growth has been strong this year, Banco de México is rightly concerned about a slowdown.  Much of the risk comes from the United States, which is Mexico's key export market.  Not only are U.S. consumers still holding back on their spending, but inventory rebuilding by U.S. companies is continuing to moderate, and the effects of fiscal stimulus are starting to wane.  These risks are especially important because Mexican consumer spending still has not accelerated enough to make up for any slowdown in exports, and Mexican investment is still nearly frozen.  Combined with Mexico's falling inflation rate, all this argues for continued low interest rates.

Patrick Fearon, CFA
Vice President, Fund Management

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