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