Mexico: Banxico leaves interest rates unchanged as Fed buys time
March 26, 2015
Expectations that the U.S. Federal Reserve (Fed) will raise interest rates later this year, combined with a sharp weakening of the peso, prompted some speculation that Mexico’s Central Bank (Banxico) would front run the Fed with a pre-emptive interest rate hike. However, the surprising dovish tone that the Fed took at its last monetary policy meeting in March bought Banxico some time. At its 26 March monetary policy meeting, the Central Bank decided to leave the target for the overnight interest rate unchanged at 3.00%, a move that was on par with market expectations. The key monetary policy rate has now been this record-low for ten consecutive months.
In the statement accompanying its decision, the Bank said that economic activity started the year on a weak footing, with exports registering less dynamism at the outset of the year, mainly due to sluggish growth in the U.S. manufacturing sector. In addition, the bank went on to recognize that it continues to see a reduction in oil production, which has had a negative impact in Mexico’s industrial production. That said, Banxico stated that fixed investment was continuing to recover gradually, while growth in private consumption remains muted.
Regarding consumer prices, monetary authorities said that the evolution of inflation in the first months of 2015 has been favorable, highlighting that the increases in core inflation—which excludes volatile categories from the overall basket—were lower than in previous years. That said, the Central Bank stated that the impact of the peso’s recent depreciation on consumer prices was in line with its expectations. Only prices for tradable goods rose without generating “second order effects”, meaning that were no transitory effects on the evolution of consumer prices. Consequently, the Central Bank stated that it still expects inflation (and core inflation) to remain close its medium-term 3.0% target in the first half of 2015 and to fall below the target at the end of 2015.
Banxico concluded that its decision to leave interest rates unchanged reflects the fact that economic activity is still weak, inflation is low and inflation expectations remain anchored. However, the Bank recognized that since the Mexican economy remains closely integrated into the global economy, particularly that of the U.S., monetary policy actions in the United States would have important repercussions on Mexico’s exchange rate, inflation and inflation expectations. Therefore monetary authorities also stated that they will, in particular, monitor the evolution of the United States’ monetary policy.
Author: Ricardo Aceves, Senior Economist