MexECON Blog

Central Bank Holds Rates at 3.00 Percent

In a decision on Friday, policymakers at Banco de México held their benchmark interest rate at 3.00%, unchanged since the last rate cut in June.  In their statement, the policymakers noted that Mexico's financial markets could be significantly disrupted by the recent economic deceleration in Europe and Asia and new geopolitical risks such as the Ebola epidemic.  Nevertheless, they were encouraged that the global slowdown could push out the day when the U.S. Federal Reserve finally raises interest rates.  They noted that the Mexican economy continues to recover from its recent soft spot, owing both to rebounding exports and improved domestic demand, and that the government's recent economic reforms could bolster growth going forward.  While they said Mexican consumer prices would likely end 2014 about 4.0% higher than at the end of 2013, they continued to expect inflation to fall toward their goal of 3.0% in mid-2015.

Comment:  It still appears that Banco de México's next policy move will more likely be a rate hike than a rate cut.  However, the policymakers seem to think that move can be pushed further out into the future.  If the weak growth in Europe and Asia holds back the U.S. economy too much, the Federal Reserve could postpone its eventual rate hikes, and that would allow Banco de México to hold rates low for as long as necessary to help eliminate the slack in the Mexican economy.  Nevertheless, it should be remembered that the markets could start to worry about impending rate hikes in the United States at any time.  If those worries prompt another round of capital flight from emerging markets such as Mexico, the policymakers may be forced to hike rates earlier than they would like.

Patrick Fearon, CFA
Vice President, Fund Management

Benchmark Rate 1410

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