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 a record-low of 3.00%, right where it has been since the last rate cut in June.  In their statement, the policymakers emphasized the contradictory risks facing the Mexican economy.  They noted, for example, that U.S. economic growth was continuing to strengthen, even as other key developed and developing countries appeared to be losing momentum.  They noted that Mexican exports and private investment have been accelerating, but lagging consumption spending and weak public investment still left the economy with significant slack.  Finally, they reiterated their previous view that the Mexican inflation would most likely fall to their target of 3.0% in 2015, but they warned that the recent plunge in the value of the peso could potentially keep price hikes larger than expected.  On balance, the policymakers felt that the slowdown in the global economy outside of North America had increased the downside risks to growth, while the weak peso had raised the upside risk to inflation.

Comment:  I think the policymakers at Banco de México are being too pessimistic about the Mexican economy.  Since Mexico is so closely tied to the United States, the ongoing recovery north of the border should continue to pull the Mexican economy along nicely.  Moreover, the recovery in Mexico's construction sector is helping boost economic growth, and stronger hiring looks set to accelerate consumer spending.  I certainly was cautious on the Mexican economy for much of 2014, but I am now significantly more optimistic, and I believe that Mexican inflation may not fall to the central bank's target of 3.0% as quickly as the policymakers believe.  Most important of all, the U.S. Federal Reserve will likely start raising interest rates by mid-2015, and there is a notable risk that the move will spark a destabilizing flight of capital out of the emerging markets.  Therefore, Banco de México should probably focus more heavily on laying the groundwork for raising its benchmark rate in 2015.

Patrick Fearon, CFA
Vice President, Fund Management

Benchmark Rate 1412

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