MexECON Blog

Central Bank Holds Rates at 4.50 Percent

Policymakers at Banco de México today decided to hold their benchmark interest rate at 4.50%, right where it has been since July 2009.  In their statement, the policymakers said Mexican industrial production and exports continue to demonstrate "vigorous" growth in response to stronger demand from the United States, but they noted that the recovery in domestic demand has been weak.  Consumption has been growing only slowly, and private investment has not yet turned up.  On balance, according to the policymakers, demand is weak enough to keep the Mexican economy growing below its potential, while salary growth has been moderate and inflation expectations remain under wraps.  Coupled with the strengthening in the peso earlier this year, the policymakers said these forces should offset the inflationary impact of higher taxes and increased public-sector prices.  The policymakers reiterated their goal to bring inflation down to 3.0% by the end of 2011.

Comment:  The central bank cut interest rates aggressively as the global economy spiraled downward in early 2009.  In seven straight cuts, the policymakers brought their benchmark rate down from 8.25% to the current 4.50%.  Until recently, the revival in Mexico's industrial sector was beginning raise pressure for increased rates in the relatively near future.  Moreover, inflation is still running above target, with the April consumer price index up 4.3% from the same month one year earlier.  However, the situation may now be changing.  With the global financial markets again volatile and investors again panicky about the prospect of potential debt defaults in Europe, the economic recovery in Mexico looks more at risk than it did just a few weeks ago.  The central bank is still likely to start raising rates again in the second half of 2010, but if financial volatility continues, it could hold off until early 2011.

Patrick Fearon, CFA
Vice President, Fund Management

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