MexECON Blog

Central Bank Holds Rates at 3.00 Percent

In a decision earlier this month, policymakers at Banco de México held their benchmark interest rate at a record low of 3.00%, precisely where it has been since the last rate cut in June 2014.  In their statement, the policymakers said the Mexican economy was continuing to grow moderately, as a certain improvement in non-petroleum exports and somewhat stronger consumer spending was helping to offset weaker manufacturing, construction, and petroleum production.  Nevertheless, the rate of economic growth was too little to significantly reduce the remaining slack in the economy.  That slack, in turn, was helping offset the inflationary pressure from the weak peso.  The policymakers judged that the current interest rate would therefore be consistent with Mexican inflation remaining at or below their target of 3.0% through the end of 2016.  If higher U.S. rates later this year cause the peso to drop more dramatically, boosting inflation pressures, the policymakers reiterated their previous assurances that they would be prepared to hike interest rates.

Comment:  Minutes from the early-June policy meeting show the officials have moved away from their earlier willingness to raise Mexican rates even before the Federal Reserve hikes U.S. rates.  An anticipatory rate hike is still possible, especially if the financial markets become more volatile as the U.S. rate hike approaches, but it now looks much more likely that Banco de México will put off any action as long as possible.  That is especially the case given that Mexican inflation has fallen below the policymakers' target, and economic growth is modest.

Patrick Fearon, CFA
Portfolio Manager

Benchmark Rate 1506

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