MexECON Blog

Central Bank Holds Rates at 4.50 Percent

On Friday, Banco de México decided to hold its benchmark interest rate at 4.50%, right where the rate has been since July 2009.  According to the policymakers, Mexican production and manufacturing exports have continued to look "vigorous," principally because of stronger economic activity in the United States.  However, domestic spending remains weak, reflecting relatively low consumer demand and limited investment activity.  With the economy still growing below potential, the policymakers said they expect inflation to remain close to forecasted levels, with prices held back by limited wage growth, an appreciating currency, and moderate inflation expectations.  They reiterated their goal to bring inflation down to 3.0% by the end of 2011.

Comment:  Like many central banks, Banco de México cut interest rates aggressively as the global recession worsened in 2009.  In seven straight cuts, it brought the benchmark down from 8.25% to the current 4.50%.  Now, the policymakers face a more difficult choice.  Domestic demand is still muted, which argues for extending the current low interest rates.  However, the recent strength in Mexican exports and manufacturing could soon start to have a more positive impact on domestic spending, which would eventually soak up spare productive capacity.  Moreover, inflation is still relatively high.  In March, the consumer price index accelerated to a rise of 5.0% year-over-year.  The most likely scenario is probably that the policymakers will start raising interest rates again in the second half of 2010.

Patrick Fearon, CFA
Vice President, Fund Management

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