MexECON Blog

Central Bank Holds Rates at 4.50 Percent

In a decision on Friday, Banco de México decided to keep its benchmark interest rate unchanged at 4.50%, right where it has been since July 2009.  In their statement, the policymakers emphasized the downside risks stemming from the current slowdown in the U.S. economy.  Importantly, the policymakers forecast that U.S. economic activity would continue to slow in response to elevated unemployment, continued deleveraging, and remaining problems in the U.S. housing sector.  Because of the slowdown in the United States, they said it was possible that Mexican exports and industrial production could moderate in the near term.  The policymakers said Mexican inflation has fallen faster than anticipated, and they expected inflation would continue to trend lower in 2011 because of stabilizing tax rates, excess capacity, strong competition, stable exchange rates, and falling inflation abroad.  They reiterated their goal to bring inflation down to 3.0% by the end of 2011.

Comment:  The Mexican economy has grown strongly over the last year, including a Chinese-scale increase of 3.2% (13.4% annualized) in the second quarter of 2010.  Nevertheless, Banco de México is rightly concerned that the recovery still may not be self-sustaining.  The recovery to date has been driven by strong exports to the United States and a resulting rise in industrial production and hiring.  If the U.S. economy stalls out before the Mexican recovery is more broadly based, Mexico's growth could peter out prematurely.  Along with falling inflation in Mexico, this argues for continued low interest rates.  It is unlikely that Banco de México will hike rates again until 2011.

Patrick Fearon, CFA
Vice President, Fund Management

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