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