Mexico: Banxico leaves interest rates unchanged following Fed's decision
September 21, 2015
At its 21 September monetary policy, the Central Bank of Mexico (Banxico) decided to leave the target of the overnight interest rate unchanged at 3.00%. The majority of market analysts had expected the Central Bank’s decision following the previous week’s decision by the U.S. Federal Reserve to hold its fire on lifting interest rates. Prior to the Fed’s meeting, which took place on 16 and 17 September, market analysts had expected Banxico to follow a U.S. interest rates hike with one of its own. The Fed’s decision gave Banxico some room to breathe, as Mexico’s monetary policy makers continue to face a dilemma in terms of how they will deal with an interest rate hike in the United States as well as the weakening of the Mexican peso.
The tone of Banxico’s statement was balanced. Banxico continued to point out that the economy, despite being firm, is far from booming, although this time the Bank depicted the state of economic growth slightly better than in previous communications. Regarding the evolution of consumer prices, Mexican monetary authorities continued to emphasize that inflation remains below its 3.0% target and that pass-through effects from currency weakness have only been seen in prices for durable goods with no knock-on effects on overall inflation. Consequently, Banxico indicated that inflation expectations remain anchored despite the peso’s depreciation. Compared to previous statements, this time the Central Bank dedicated a large paragraph to the latest financial developments—financial volatility due to the uncertainty regarding the Fed’s interest rate hike as well as concerns regarding economic growth in China and its impact on global commodities prices—and indicated that the exchange rate has been bearing the brunt global financial volatility, while underlining that a U.S. interest rate increase could prove disruptive as investors are likely to pull money out of Mexico if the gap between the two countries’ monetary policy rates narrows.
Finally, the Foreign Exchange Commission (FEC) decided not to renew the foreign exchange mechanisms that are currently in place to support the Mexican peso. Along with the July monetary policy decision, the FEC stepped up its foreign exchange intervention, signaling coordination with the Central Bank.
As has been mentioned in previous editions of the LatinFocus Consensus Forecast, while Mexico still has a healthy level of international reserves, a sudden transition toward higher interest rates in the U.S. will further increase volatility in financial markets, which will take a heavy toll on emerging market currencies and the Mexican peso will be no exception.
Author: Ricardo Aceves, Senior Economist