Policymakers at Banco de México today held their benchmark
interest unchanged at 4.00%, after cutting the rate from 4.50% in
March. In their statement, the policymakers noted that weaker
economic activity abroad had already impacted the Mexican economy,
with exports and some aspects of domestic demand
decelerating. In the policymakers' view, risks to economic
growth and inflation remained weighted to the downside. They
noted that Mexican inflation has recently accelerated, but they
expected it to resume falling toward their goal of 3.0%.
Comment: In March, Banco de
México cut interest rates for the first time since 2009, in large
part to discourage the recent high inflows of capital from
abroad. Those inflows have driven up the value of the
peso. In addition, they present the risk that they could
destabilize the economy if they suddenly reverse.
Unfortunately, capital inflows continued to rise rapidly after the
rate cut, at least until recently. The policymakers are now
likely to maintain rates at their current level for a while to
gauge whether they will eventually reduce the flows into
Mexico. Rates are likely on hold for the time being.
Patrick Fearon, CFA
Vice President, Fund Management