MexECON Blog

Central Bank Holds Rates at 4.00 Percent

In a decision Friday, policymakers at Banco de México held their benchmark interest rate unchanged at 4.00%.  In their statement, the policymakers noted that Mexican economic growth had slowed significantly in the first months of 2013, in part because foreign demand for Mexican manufactured products has stalled and in part because the expansion in domestic demand has slowed down.  They expected growth to accelerate again in the second part of the year, but they believed downside risks to the economy have "intensified."  With regard to inflation, the policymakers took note of the recent acceleration in Mexico's consumer price index, but they stressed that the acceleration can be traced to transitory problems such as statistical distortions and temporary food supply shocks.  Since "core" consumer prices are rising relatively slowly, the policymakers expected overall inflation to fall to 3.0% to 4.0% by the second half of the year.  They therefore felt that leaving the benchmark rate at 4.0% would be consistent with inflation eventually falling to their goal of 3.0%.

Comment: Banco de México cut interest rates in March in order to discourage destabilizing inflows of foreign capital, but the impact took some time to show up.  In May, capital flows finally seemed to ease, and the peso entered a steep correction.  Now, the main issue is the big slowdown in Mexican economic growth since the beginning of the year.  There are signs that at least some sectors of the economy are in a tentative rebound, but growth is unlikely to re-accelerate to the strong rates of the last few years, and the policymakers are rightly concerned about further downside risks.  Against this backdrop, it appears Mexican interest rates are on hold for the time being.

Patrick Fearon, CFA
Vice President, Fund Management

Benchmark Rate 1305

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