MexECON Blog

Central Bank Holds Rates at 3.00 Percent

In a decision last Thursday, policymakers at Banco de México held their benchmark interest rate at a record-low 3.00%, right where it has been since the last cut in June.  In their statement, the policymakers noted that Mexican economic activity had weakened a bit at the turn of the year, reflecting softer demand for Mexican exports, declining petroleum production at home, and disappointing consumer activity.  They expressed satisfaction that consumer price inflation had fallen slightly below their goal of 3.0% and was expected to stay that way for the foreseeable future, but they also highlighted the risk that the Federal Reserve would soon hike U.S. interest rates.  They noted that impending U.S. rate hikes had been a key reason for the decline in the value of the peso over the last several months.  While they believed that keeping their benchmark rate at its current level would be consistent with maintaining inflation close to their target, they promised to keep a close eye on the Federal Reserve and the possibility that a further drop in the peso could boost Mexican inflation.

Comment:  Mexico's monetary policymakers are clearly concerned about the impact of rising U.S. interest rates.  They have already launched two different programs to support the peso via dollar purchases, and they are actively encouraging the government to maintain its fiscal discipline so as to avoid scaring off foreign investors.  Banco de México Governor Agustín Carstens has explicitly said that the policymakers may even raise rates before the Federal Reserve does in order to forestall an outflow of capital, excessive currency volatility, and the possibility that the weak peso will increase Mexican inflation.  All this suggests that Mexican interest rates are likely to increase again in the coming months.

Patrick Fearon, CFA
Portfolio Manager

Benchmark Rate 1503

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