MexECON Blog

Central Bank Holds Rates at 4.50 Percent

Policymakers at Banco de México today decided to hold their benchmark interest rate unchanged at 4.50%, right where it has been since mid-2009.  In their statement, the policymakers noted that the Mexican economy continues to grow, but they said the growth rate has slowed in response to weaker activity and gathering risks abroad.  The policymakers noted that price inflation in Mexico has recently worsened, but they ascribed the acceleration primarily to food supply shocks that should be transitory.  They repeated their longstanding argument that low inflation in domestic services was a sign that price pressures are not spreading.  In fact, they predicted that the September inflation rate of 4.8% would be the maximum for the year, and that inflation would fall back to approximately 4.0% by the end of 2012 before converging again on their target of 3.0% during 2013.  Nevertheless, the policymakers explicitly committed themselves to raise interest rates if necessary, saying that if the recent supply shocks persist, they would consider it prudent to bring about a near-term adjustment in the benchmark rate.

Comment:  Compared with Banco de México's previous statements, this one suggests the policymakers are now perhaps a bit less confident that Mexican inflation will fall back as earlier expected.  Their explicit commitment to adjust rates if inflation pressures persist is particularly noteworthy.  The policymakers are still likely to hold off on any rate hikes in the next few months, but there is an increasing chance that they will raise rates in early 2013.  Against a backdrop of continued low interest rates and loose monetary policy in the developed countries, the prospect of a rate hike in Mexico would probably put additional upward pressure on the peso.

Patrick Fearon, CFA
Vice President, Fund Management

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