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%, precisely where it has been since mid-2009.  In their statement, the policymakers said that while the Mexican economy continues to expand, the rate of growth has moderated in response to softening exports and weaker investment.  They also pointed to a "notable" drop in Mexican inflation since the end of summer.  They ascribed the drop not only to the dissipating impact of supply shocks earlier in early 2012, but also to the modest slowing in economic growth and a strengthening of the peso since mid-year.  According to the policymakers, "Even though inflation has remained at elevated levels for several months, up to now there is no evidence that suggests generalized upward pressure on prices due to medium and long-term inflation expectations or the labor market."  The policymakers expected the conditions putting downward pressure on inflation would remain in place, and that, "general annual inflation will continue to diminish in the coming months, consolidating a tendency converging on 3.0% in 2013."  Despite their expectation that inflation would fall to their 3.0% goal, however, the policymakers reiterated that they stand ready to raise interest rates if necessary to fight a rebound in inflation or inflation expectations.

Comment:  At their last meeting on October 26, rising inflation drove Mexico's monetary policymakers to explicitly commit to rate hikes if price pressures persist.  With their statement today, they show that they have regained their confidence that inflation will soon fall back.  I therefore repeat my forecast that Mexican interest rates are probably on hold for at least the next few months.  Nevertheless, Mexican inflation is still running high; if U.S. policymakers are able to head off the "fiscal cliff" of tax hikes and spending cuts programmed for year's end, reaccelerating growth throughout North American could keep inflation from falling much further.  The continuing possibility of higher Mexican interest rates some time in 2013 is probably a key reason why today's dovish statement did not drive the peso lower.

Patrick Fearon, CFA
Vice President, Fund Management

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