MexECON Blog

Central Bank Holds Rates at 4.50 Percent

Policymakers at Banco de México decided today to hold their benchmark interest rate unchanged at 4.50%, right where it has been since July 2009.  In their statement, however, the policymakers took note of the deteriorating economic environment at home and abroad and pledged that, if warranted, they would adjust rates downward in the future.  In support of this pledge, the policymakers said several factors would likely lead to continued moderation in Mexican inflation.  They noted that because of weaker demand abroad and moderating growth in domestic spending, Mexico's "output gap" would likely close more slowly than previously thought.  They also said historically low inflation in core domestic services signaled price pressures would likely remain moderate.  The policymakers reasserted their view that current monetary policy would bring inflation down to their long-term target of 3.0%.

Comment:  The policymakers' pledge to adjust interest rates if necessary is best seen as a bit of insurance in case the late-summer deterioration in global economic fundamentals worsens.  At present, global financial markets appear to have stabilized, and incoming data is more consistent with an economic soft spot than renewed recession.  Therefore, the most likely scenario going forward is that Mexican rates will stay where they are for the time being.  If the global economic soft spot does not worsen into outright recession, the next move in Mexican interest rates is still likely to be upward, sometime in the future.

Patrick Fearon, CFA
Vice President, Fund Management

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