MexECON Blog

Central Bank Holds Rates at 3.50 Percent

In a decision Friday, policymakers at Banco de México held their benchmark interest rate unchanged at 3.50%.  The benchmark has been at that level since the last rate cut in September.  In their statement, the policymakers noted that the Mexican economy's return to growth in the third quarter stemmed mostly from stronger exports.  In contrast, they said that, "indicators of private consumption and investment . . . do not show clear signs of recuperation."  The policymakers therefore expected the economy to have considerable slack for a prolonged period.  They also expected inflation to remain around 3.5% and even rise modestly in 2014 because of programmed tax increases.  However, they believed that the slack in the economy and the current level of interest rates would help bring inflation down to their goal of 3.0% by 2015.
Comment:  Given the continuing slack in Mexico's domestic demand, holding rates steady seems like a reasonable decision for the central bank.  Besides, global investors now seem a bit more tranquil that the U.S. Federal Reserve may start to tighten monetary policy as early as this month.  That reduces the risk that Mexico's recent rate cuts will spark an outflow of capital.  In sum, monetary policy settings in Mexico appear to be correct and should help to further strengthen the economy after its soft spot earlier in 2013.  Stronger exports and Banco de México's low interest rates should keep the economy growing, but tight fiscal policy, weak construction activity, and falling consumer demand will probably keep the growth rate modest in the near term.
Patrick Fearon, CFA
Vice President, Fund Management

In a decision Friday, policymakers at Banco de México held their benchmark interest rate unchanged at 3.50%.  The benchmark has been at that historically low level since the last rate cut in September.  In their statement, the policymakers noted that the Mexican economy's return to growth in the third quarter stemmed mostly from stronger exports.  In contrast, they said that, "indicators of private consumption and investment . . . do not show clear signs of recuperation."  The policymakers therefore expected the economy to have considerable slack for a prolonged period.  They also expected inflation to remain around 3.5% and even rise modestly in 2014 because of programmed tax increases.  However, they believed that the slack in the economy and the current level of interest rates would help bring inflation down to their goal of 3.0% by 2015.

Comment: Given the continuing slack in Mexico's domestic demand, holding rates steady seems like a reasonable decision for the central bank.  Besides, global investors now seem a bit more tranquil about the possibility that the U.S. Federal Reserve may start to tighten monetary policy as early as this month.  That reduces the risk that Mexico's recent rate cuts will spark an outflow of capital.  In sum, monetary policy settings in Mexico appear to be correct and should help to further strengthen the economy after its soft spot earlier in 2013.  Stronger exports and Banco de México's low interest rates should keep the economy growing, but tight fiscal policy, weak construction activity, and falling consumer demand will probably keep the growth rate modest in the near term.

Patrick Fearon, CFA
Vice President, Fund Management

Benchmark Rate 1312

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