MexECON Blog

Another Hint of Upcoming Rate Cuts

In a speech on Friday, Banco de México Governor Agustín Carstens said that as Mexico enters into a period of slower economic growth and weaker price increases, lower interest rates would still be consistent with inflation falling to the central bank's 3.0% target.  In the new environment, he even said that it may be "advisable" to cut the benchmark interest rate from its current 4.50%.  Carstens reiterated the bank's previous assurances that it would remain vigilant to all of the factors that could affect inflation in order to ensure that the target is reached.  Nevertheless, a recent poll by Banamex found that 19 of 23 analysts expect Banco de México to cut its benchmark rate to 4.00% by its policy meeting on April 26.

Comment:  At the last policy meeting on January 18, Mexico's monetary policymakers held rates steady at 4.50%, where they have been since 2009, but they said they would be willing to cut rates in the future if economic growth and inflation continue to fall.  Since then, several economic indicators have weakened.  Inflation has fallen sharply from its spike in late 2012.  Just as important, monetary authorities in several other large countries (particularly Japan) have signaled their intent or at least temptation to weaken their currencies in order to improve their international competitiveness.  Mexican policymakers surely understand that if other countries are working to weaken their currencies, maintaining Mexico's exports may require cutting rates in order to put downward pressure on the peso.  It therefore rings true to me that Mexico will soon cut interest rates.

Patrick Fearon, CFA
Vice President, Fund Management

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