Mexico: Banxico maintains rates following increase in January, authorities will watch the peso closely
February 10, 2016
In the first meeting of the year, Mexico’s Central Bank (Banxico) left the target of the overnight interest rate unchanged at 3.25%, which was a decision broadly expected by the markets. Banxico decided to leave the interest rate unchanged in February following monetary authorities’ decision to hike interest rates in December for the first time since 2008 in the wake of the U.S. Federal Reserve rate increase.
In an unusual fashion, in the accompanying statement Mexican monetary authorities included a thorough discussion on global uncertainties (global economic growth is showing signs of weakness, deceleration in emerging economies, stagnation in global trade and the persisting global oil glut), downside risks to economic activity, as well as risks for a disorderly financial adjustment in emerging markets. Moreover, most of the discussion about Mexico was centered on the evolution of the exchange rate, particularly the “significant additional depreciation” of the currency. The Central Bank stated that, since December, the Mexican peso has depreciated notably against the U.S. dollar on the heels of the U.S. interest rate hike and continued to weaken significantly in January, despite the Fed’s decision to refrain from raising rates in that month. At the end of January, the peso closed at 18.11 MXN per USD, which was lower than the 17.18 MXN per USD registered at the start of the year. On an annual basis, the peso lost 22.3% of its value at the end of January. Moreover, the weakness in the currency persisted at the beginning of February, with the Mexican peso registering another multi-year low and nearly touching the 19.0 MXN per USD barrier on 10 February. Due to the peso’s weakness, the Central Bank stated that it had intervened twice in the market since the beginning of the year, selling USD 200 million in two auctions.
While Mexico’s economic activity remained solid through 2015 as a whole, the Central Bank recognized that growth lost momentum in the last quarter of the year. Nonetheless, overall economic growth continued to be supported by robust private consumption as a result of an improvement in the labor market and low inflation. Conversely, the external sector continued to feel the negative spillovers from a deceleration in the U.S. industrial sector and fixed investment lost dynamism in the final quarter of the year.
Regarding the evolution of consumer prices, Banxico stated that inflation eased in December and closed 2015 at the lowest level on record, while data for January showed a mild increase, which was mainly the result of a base effect. Banxico stated that the environment of low inflation is due to the ongoing declines in commodities prices and other prices related to the structural reforms that have been enacted—namely in telecoms prices. Similarly, Banxico noted that inflation expectations continued to decline and that second-round effects coming from the weakness in the currency remain absent.
Author: Ricardo Aceves, Senior Economist