MexECON Blog

Central Bank Holds Rates at 4.50 Percent

In a decision Friday, policymakers at Banco de México decided to keep their benchmark interest rate unchanged at 4.50%, precisely where it has been since July 2009.  In their statement, the policymakers said export growth and manufacturing continue to grow strongly in Mexico, but could slow in response to an expected moderation in the U.S. economic recovery.  They also noted that domestic investment remains depressed and consumption spending is still not growing as fast as before the recession.  The policymakers said inflation is coming in lower than expected and is likely to remain so in the coming months.  They reiterated their goal to bring inflation down to 3.0% by the end of 2011.

Comment:  The Mexican economy is in a robust rebound, with second-quarter gross domestic product up an impressive 7.6% year-over-year.  Nevertheless, the rebound is uncomfortably dependent on rising exports to the United States, particularly exports of trucks, autos, and auto parts.  If U.S. inventory rebuilding continues to slow and U.S. corporate and consumer demand do not accelerate soon, Mexican exports could stall before consumer spending and corporate investment are growing fast enough to take up the slack.  As long as inflation is low and falling further, this is solid justification for Banco de México to keep interest rates unusually low.  On balance, the decision to keep rates unchanged is supportive of the Mexican economic rebound and should give a further life to Mexican asset prices.

Patrick Fearon, CFA
Vice President, Fund Management

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