MexECON Blog

Central Bank Holds Rates at 4.50 Percent

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

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