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%, after unexpectedly slashing the rate from 3.50% in June.  In their statement, the policymakers noted that accelerating exports seemed to be lifting Mexican economic growth.  Because of continued weakness in domestic demand, however, they did not expect the slack in the economy to be used up until the end of 2015.  They therefore felt confident that inflation would continue to decline toward their target of 3.0%.  In spite of the U.S. Federal Reserve gradually reducing its asset purchases and drying up some of the liquidity in global financial markets, the policymakers also felt reassured by the continued flow of capital into Mexico.  With the environment appearing benign, they saw no need to further adjust policy.

Comment:  The big rate cut in June and the decision to keep rates low in July show that Banco de México is doing its part to help jumpstart the economy after its weak spot in late 2013 and early 2014.  Rebounding exports are still probably the biggest reason for the recent reacceleration, but lower interest rates should play a supporting role.  That is especially true because one key headwind for the economy is that a change in government housing policy has virtually frozen residential construction, leaving many of the country's homebuilders in dire financial straits.  Lower interest rates could theoretically help stabilize those firms, contributing to a tentative rebound in the sector.  Tight fiscal policy, tepid hiring, and weak consumer spending mean that domestic demand as a whole is still a headwind for the economy, but the economic outlook does seem to be improving.

Patrick Fearon, CFA
Vice President, Fund Management

Benchmark Rate 1407

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