MexECON Blog

Central Bank Holds Rates at 4.50 Percent

Banco de México today decided to keep its benchmark interest rate unchanged at 4.50%, right where it has been since July 2009.  In their statement, the policymakers noted recent signs that Mexican economic growth could be moderating, in large part because of slowing demand from abroad and continued weak investment at home.  However, they also made special note of the U.S. Federal Reserve's decision to begin buying Treasury bonds again.  The policymakers warned this policy would exacerbate recent strong capital flows into Mexico and would likely increase inflation throughout the emerging countries of the world.  They even suggested Mexican inflation would likely continue to rebound through the end of 2010 and resume falling only in 2011.  The policymakers reiterated their goal to bring inflation down to 3.0% by the end of 2011.

Comment:  In recent weeks, several economists and even Banco de México Governor Carstens himself have suggested Mexican monetary policy might have to be loosened in order to stop the appreciation of the peso and deal with moderating economic growth.  On the other hand, rebounding inflation argues for holding rates at least steady and maybe raising them.  In sum, the outlook for monetary policy in Mexico has become much more uncertain than in the recent past.  This may be one reason why the peso has been weakening through much of November.  Looking forward, the currency is likely to continue under some pressure until the outlook for monetary policy and Mexican economic growth becomes clearer again.

Patrick Fearon, CFA
Vice President, Fund Management

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