MexECON Blog

Central Bank Holds Rates at 4.50 Percent

In a decision on Friday, policymakers at Banco de México decided to hold their benchmark interest rate unchanged at 4.50%, right where it has been since July 2009.  In contrast to their statement after their last meeting, in December, the policymakers took note of the recent improvement in the U.S. economy, though they also noted that growth in the United States would likely remain muted for a long time to come.  They noted the Mexican economy had proven "resistant" to the deterioration in the global economy in late 2011, and they judged that the balance of risks for Mexican economic growth had improved.  Likewise, they said the balance of risks for Mexican inflation had started to look better.  According to the policymakers, the inflation pressures that arose in late 2011 and early 2012 have already started to ease.  The policymakers ascribed those pressures principally to non-core categories, and they noted that core inflation has remained subdued.  They also said that while the fall in the value of the peso last year had put upward pressure on goods prices, there was no evidence that those pressures were spreading to services.  In this environment, the officials said the current stance of monetary policy was consistent with overall inflation falling to their target of 3.0%.

Comment:  Belatedly, the officials at Banco de México have recognized the improvement in the global economic environment and in the Mexican economy itself.  On the other hand, they still seem over-optimistic regarding inflation.  As I have noted before, the recent surge in Mexican producer prices seems to suggest consumer prices will keep accelerating.  The ongoing rebound in the peso could help mitigate that dynamic, but for now, I would still expect rising goods prices to eventually boost services prices as well.  Even though the policymakers again stated their willingness to cut rates if required by a deteriorating global economy, it appears to me that Mexican interest rates are very unlikely to be cut in the near future.

Patrick Fearon, CFA
Vice President, Fund Management

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