MexECON Blog

Central Bank Holds Rates at 4.50 Percent

Policymakers at Banco de México decided to hold their benchmark interest rate unchanged at 4.50%, just where it has been since July 2009.  In their statement, the policymakers pointed to continued deterioration in the global economy, particularly because of the debt crisis in Europe and slowing growth in Asia.  They largely ignored the recent improvement in the U.S. economy.  The policymakers said Mexico's economy continues to grow, though at a slower pace than earlier in the recovery.  They said Mexican inflation has started to tick up, but they noted "core" inflation has remained low.  According to the policymakers, price pressures arising from the recent decline in the value of the peso will likely be transitory, and current interest rates will bring inflation down to their long-term goal of 3.0%.  Seeing continued downside risks to economic growth and stable inflation, the policymakers repeated their assurance that they stand ready to cut rates if necessary to support growth.

Comment:  The policymakers at Banco de México seem unjustifiably pessimistic, especially in their view of U.S. economic developments.  It probably makes sense for them to reiterate their willingness to cut rates if the global economic situation deteriorates again.  However, with the U.S. economy gaining traction again, there is probably only a small chance that they will really cut rates in the near future.  In contrast, the policymakers seem too optimistic about Mexican inflation.  Incoming data suggests price pressures are increasing, not decreasing.  Therefore, while Mexican interest rates will probably be stable in the near term, the next move just as likely to be a rate hike as a rate cut.

Patrick Fearon, CFA
Vice President, Fund Management

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