In a decision last Friday, policymakers at Banco de México held
their benchmark interest rate unchanged at 4.50%, right where it
has been since mid-2009. In their statement, the policymakers
said Mexican economic growth has moderated, primarily reflecting
softer demand overseas and diminished activity in some
trade-related domestic industries. They also highlighted the
sharp drop in Mexican inflation late in 2012. The
policymakers said inflation expectations remain well anchored, and
wage inflation remains modest. They expected that inflation
in 2013 would trend toward their long-term objective of 3.0%.
In contrast to their statements in late 2012, when they expressed
their willingness to raise interest rates if necessary to fight
inflation, the policymakers said that they would now consider
cutting rates if economic grow and inflation continue to fall.
Comment: The discussion of
benign inflation and the mention of possible rate cuts if growth
and inflation slow further is a big change for Banco de
México. Throughout the second half of 2012, the main concern
in the market was higher inflation, not lower inflation. As a
result, the policymakers felt compelled to give reassurances that
they were watching price levels and stood ready to raise rates if
necessary. Now, with economic activity in Mexico slowing
significantly, and with inflation down to just 3.6% in December, it
appears the policymakers have shifted their attention to the
possibility that the economy could weaken more than desired.
This shift of emphasis could weigh on the peso going forward.
Patrick Fearon, CFA
Vice President, Fund Management