MexECON Blog

Central Bank Holds Rates at 4.00 Percent

In a decision on Friday, policymakers at Banco de México held their benchmark interest rate unchanged at 4.00%.  In their statement, the policymakers said the deceleration in the Mexican economy that became apparent during late 2012 had worsened in the second quarter of 2013, reflecting both a slowdown in exports and weakness in domestic spending.  They expected activity to strengthen again in the second half of the year, but because of the rapid and deep deceleration that had already occurred, they felt that the downside risks to the Mexican economy had become elevated.  The policymakers said Mexican consumer inflation had begun to decrease, and inflation expectations remained well anchored.  They expected inflation to stay between 3.0% and 4.0% through the second half of the year before falling to their target of 3.0% in 2014.  Given the slack in the economy and the recent volatility in global financial markets, the policymakers decided to hold rates steady, but they reiterated that they would remain attentive to inflation risks and take all necessary steps to reach their goals.

Comment:  After Banco de México cut rates in March, some observers thought follow-on rate cuts were likely.  With the big outflow of capital from the emerging markets since May, and with the peso weakening until very recently, the policymakers now seem most likely to hold things steady for a while.  In the unsettled environment where many investors believe the U.S. Federal Reserve may be ready to tighten monetary policy soon, the officials at Banco de México are reluctant to rock the boat.  Interest rates in Mexico appear to be on hold for the time being.
Patrick Fearon, CFA.
Vice President, Fund Management

Comment: After Banco de México cut rates in March, some observers expected additional cuts.  With the big outflow of capital from the emerging markets since May, and with the peso weakening until very recently, the policymakers now seem most likely to hold things steady for a while.  In the unsettled environment where many investors believe the U.S. Federal Reserve may be ready to tighten monetary policy soon, the officials at Banco de México are reluctant to rock the boat.  Interest rates in Mexico appear to be on hold for the time being.

Patrick Fearon, CFA
Vice President, Fund Management

Benchmark Rate 1307

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