Mexico: Banxico maintains dovish stance in first meeting of the year
January 30, 2015
Mexico’s Central Bank (Banxico) decided to leave the target for the overnight interest rate unchanged at 3.00% at its meeting on 30 January, a decision that matched market expectations. The Central Bank pointed out that the economy continued to show signs of gradual, albeit slow, recovery. According to the Bank, the external sector is improving due to higher demand from the United States, whereas growth in private consumption is still lackluster and the expected contribution from public spending to overall economic growth has been limited. As a result, the Bank affirmed that a degree of slack persists in the economy, particularly in the labor market and, consequently, demand-side inflationary pressures are not expected to occur in the coming months. The Bank also recognized that downside risks to the economy will persist going forward given the weak recovery in domestic demand.
Regarding consumer price developments, monetary authorities recognized that inflation has been falling since October 2014 and inflation expectations for the medium and long term remain stable. Monetary authorities commented that the recent weakening of the peso will have only transitory effects in the evolution of consumer prices in the coming months. Banxico stated that its decision to keep the monetary policy rate unchanged is consistent with its expectations of inflation declining to its medium-term 3% target in the first half of 2015 and to falling below the target at the end of 2015. Nonetheless, the Central Bank stated that it would remain cautious to upside risks to inflation associated with the possibility of a prolonged weakening of the currency. According to the Bank, downside risks could include slower-than-anticipated economic activity going forward. Monetary authorities also stated that they will, in particular, monitor the evolution of the United States’ monetary policy as well as the development in the exchange rate and the effects it has on inflation.
Author: Ricardo Aceves, Senior Economist