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