MexECON Blog

Central Bank Holds Rates at 3.00 Percent

In a decision on Thursday, policymakers at Banco de México held their benchmark interest rate at a record low of 3.00%, unchanged since the last rate cut in June 2014.  In their statement, the policymakers noted a continued moderation in Mexican economic growth, owing mostly to weakness in exports, non-auto manufacturing, construction, and mining.  On a more positive note, they said improved hiring and low inflation had helped boost consumer spending.  The policymakers noted that inflation remained below their medium-term target of 3.0%, but they said the weak peso had the potential to increase inflationary pressures over time.  They noted that a likely hike in U.S. interest rates in the coming months could increase volatility in the financial markets and drive the peso even lower, but the policymakers have pledged not to raise Mexican interest rates before U.S. rates go up.

Comment:  Mexican interest rates are unlikely to remain at their current record low for much longer.  Once U.S. interest rates rise, the upward pressure on the dollar and the downward pressure on the peso will probably force Banco de México to hike rates quickly and relatively aggressively in order to keep inflation contained.  In turn, that will probably keep Mexican economic growth subdued.  I don't believe the Mexican economy is as weak as many observers in the press seem to think.  I am particularly encouraged by the stronger labor market, rising consumer spending, and a potential reacceleration in U.S. industrial demand.  Nevertheless, growth in Mexico seems certain to continue undershooting its long-term average rate of 2.5% over the coming quarters.

Patrick Fearon, CFA
Portfolio Manager

Benchmark Rate 1507

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