MexECON Blog

Central Bank Holds Rates at 4.50 Percent

In a decision on Friday, policymakers at Banco de México decided to keep their benchmark interest rate unchanged at 4.50%.  In their statement, the policymakers noted that accelerating economic growth in the United States continues to give a strong impetus to Mexican manufacturing exports, while domestic demand in Mexico is growing gradually.  The policymakers also noted Mexico's output gap continues to close, and output could outstrip the economy's long-term potential as early as mid-2011.  While this might imply higher inflation pressures, they also pointed to relatively high unemployment and excess capacity in some industries as factors that could keep inflation down.  The main inflation risk that the policymakers discussed was the possibility of higher international commodity prices, reflecting such factors as political unrest in the Arab world and bad weather that has affected farm output.

Comment:  Mexico's benchmark interest rate has now been unchanged since July 2009, and the latest policy statement gives no reason to expect any change in the near future.  The balance of incoming economic reports also seems inconclusive.  On the one hand, strong economic growth, rising international commodity prices, and still-elevated inflation argue for the next move to be a rate hike.  On the other hand, sectors of the economy are still fragile, and the strong peso poses a risk to the country's exports, all of which argues for potential further rate cuts.  Considering all the evidence and the likely evolution of events in the coming months, the most likely scenario is for interest rates to be held at their current levels for a few more months, with the next move more likely to be a rate hike than a rate cut.

Patrick Fearon, CFA
Vice President, Fund Management

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