MexECON Blog

Central Bank Holds Rates at 4.50 Percent

Banco de México has announced that it will hold its benchmark interest rate at 4.50%, right where it has been since July 2009.  According to the statement, the Mexican economy continues to recover faster than anticipated, but problems such as weak private investment and muted consumer demand suggest that activity will remain below potential throughout the rest of 2010.  The statement also said that inflation is expected to remain close to forecasted levels, as prices are held back by limited wage growth, an appreciating currency, and moderate inflation expectations.  The policymakers reiterated their goal to bring inflation down to just 3.0% by the end of 2011.

Comment:  Like many central banks, Banco de Mexico cut interest rates aggressively as the global recession worsened in 2009.  In seven straight rate cuts, it brought the benchmark down from 8.25% to the current 4.50%.  While the economy is now growing again, much of the improvement seems to stem from inventory rebuilding in the United States.  If U.S. restocking peters out and the recovery fails to become more broad based, the Mexican economy could stall again.  Inflation has moderated significantly over the last year, but recent reports have been choppy, and the annual inflation rate in February was still relatively high at 4.8%.  In this environment, the policymakers face a tough balancing act between supporting the economy and making further progress toward price stability.  The most likely scenario is probably that the central bank will start raising rates again only in the second half of 2010.

Patrick Fearon, CFA
Vice President, Fund Management

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