Monday, May 4, 2015

Mexico's Central Bank Leaves Interest Rate Unchanged at 3%

MEXICO CITY – The Mexico Central Bank left the overnight rate unchanged at 3.0% in Thursday’s policy meeting, matching market expectations.

The closing paragraph from the statement was almost identical to the one from the 26 March statement. The bank wrote that it will remain watchful of all determinants of inflation and of medium- and long-term inflation expectations, but particularly the relative monetary policy stance (Mexico-United States) and the performance of the exchange rate trend.

One subtle change relative to March was that in March the bank wrote it would watch the performance of the exchange rate, and not of its trend. Analysts believe that this may be an attempt to signal that the currency trend is more important than outright levels.

The central bank sounded less upbeat about global growth than in March. In this week's report, it wrote that weakness has become more generalized across countries and regions. In March, it had written that the drop in oil prices could result in a net positive for global growth.

On the US Fed, the central bank wrote that there is now a stronger perception that liftoff will take even longer than previously anticipated. The bank argued that the drop in volatility in some international financial markets since 26 March was in response to the expectations of a later liftoff date by the US Fed.

On the domestic front, the bank upgraded somewhat its assessment of the state of the economy. In March, it wrote that economic activity had had a somewhat weak performance. This week, it wrote that economic activity continued to show moderate growth. Similarly, in March it wrote that consumption indicators had shown “little vigor.” In its latest statement, it wrote that “some consumption indicators seem to be showing some recovery.”

In March, the bank wrote that the balance of risks to growth had worsened; this week, it wrote that the balance of risks is still biased to the downside, but it did not worsen relative to late March.

Finally, on the inflation front, the bank’s assessment was almost identical to the one from the March policy statement. Specifically, the bank continues to project annual headline inflation to be “near” 3.0% in upcoming months and that it will close the year below this level. Meanwhile, the bank projects annual core inflation to be below 3.0% throughout 2015. For next year, it projects annual headline and core inflation to be “near” 3.0%. The bank reiterated that pass-through from peso weakness has been in line with expectations, impacting mainly durable goods, and without second-round effects.

"Barring a major depreciation of the peso in the next five weeks, we think that the central bank will leave the overnight rate unchanged at 3.0% in the next monetary policy meeting on 4 June," writes Alonso Cervera of Credit Suisse. "For now, the exchange rate continues to be the key variable that will likely determine the timing and extent of interest rate hikes in the remainder of 2015. We think that next year, the expected rise in inflation, and likely higher interest rates in the US will be particularly important."

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