MexECON Blog

Central Bank Holds Rates at 3.50 Percent

In a decision Friday, policymakers at Banco de México held their benchmark interest rate unchanged at 3.50%, right where it has been since the last cut in October.  In their statement, the policymakers took note of the slowdown in Mexican economic growth at the end of 2013 and the beginning of 2014, as well as the continuing slack in the country's labor market.  They therefore judged that the balance of risks for the economy had not experienced any notable improvement.  The policymakers also judged that the spike in inflation caused by new sales taxes at the beginning of the year was already dissipating as they expected.  They therefore felt that current low interest rates were consistent with inflation falling to their goal of 3.0% in the medium term.

Comment:  The policymakers at Banco de México are not only confident that inflation will fall toward their goal in the coming months and quarters, but they are also confident that Mexico's good economic fundamentals will continue to attract capital even as the U.S. Federal Reserve tightens monetary policy.  Other so-called emerging markets have suffered significant capital outflows as the Federal Reserve has begun to reduce its asset purchases, taking liquidity out of the world's financial markets.  South Africa, Turkey, and India have all been forced to raise interest rates to stem the outflow.  As the Fed keeps cutting its asset purchases, the question is whether Mexico will eventually be forced to raise interest rates as well.  Only time will tell.

Patrick Fearon, CFA
Vice President, Fund Management

Benchmark Rate 1403

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