Mexico: Banxico leaves interest rates unchanged as inflation is converging to target
June 4, 2015
The Central Bank of Mexico (Banxico) decided to keep the overnight interest rate at 3.00% at its 4 June monetary policy meeting as economic activity is gradually picking up pace and inflation is converging to the Bank’s target. Banxico’s decision was widely expected by the market.
Banxico stated that the balance of risks to growth remained was the same as it was at the previous monetary policy meeting. The Bank pointed out that, following tepid growth in the first quarter, Mexico’s economic activity is gradually gaining traction, mainly supported by stronger private consumption and exports, particularly non-oil exports. Conversely, monetary authorities stressed that the rest of the components of domestic demand are continuing to lose strength. In addition, the Bank recognized that the slack in the labor market persists and that the overall output gap is still negative. Regarding price developments, Banxico stated that inflationary pressures remain contained due to still sluggish economic activity and despite the recent weakening of the Mexican peso. As a result, the Bank stated that the balance of risks for inflation remained unchanged as well, due to few signs of demand-side pressures, and also stated that the exchange rate pass-through is still limited. As in previous statements, Banxico pointed out that inflation is likely to end 2015 below the Bank’s 3.0% target and that it will be near the target in 2016.
Similar to previous statements, the Central Bank indicated 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. The Bank also recognized that, since the Mexican economy remains closely integrated the U.S. economy, monetary policy actions in the United States would have important repercussions on Mexico’s exchange rate, inflation and inflation expectations.
Author: Ricardo Aceves, Senior Economist