Mexico: Banxico maintains rates following surprise increase in February
March 18, 2016
The Central Bank of Mexico (Banxico) decided to leave the target of the overnight interest rate unchanged at 3.75% at its monetary policy meeting on 18 March. The move, which was widely expected and in line with the Bank’s guidance, followed its surprise interest rate hike announcement on 17 February. The rate hike was part of the battery of changes announced by the Central Bank and the Ministry of Finance that represent major changes to the economic policy framework.
In its communication, the Central Bank appeared less concerned about the current macroeconomic outlook compared to its stance in the February statement. In addition, the Bank acknowledged that financial volatility has eased and that commodities prices, especially oil prices, have stabilized and even gained some of the ground lost in the first two months of the year. Monetary authorities highlighted that the extraordinary measures announced back in mid-February—a 50-basis-point interest rate hike, shift to discretionary intervention in the foreign exchange market and further budget cuts—prompted the peso “to break the negative trend” that it had experienced in the first two months of the year in response to adverse global economic conditions.
Regarding the country’s current macroeconomic fundamentals, the Central Bank signaled that economic activity is gradually slowing, particularly private consumption. In addition, Banxico continues to be concerned about a deterioration in both fixed investment and exports, especially regarding exports of manufactured goods. As in previous statements, the Central Bank commented that a degree of slack persists in the labor market and in the overall economy.
Regarding the evolution of consumer prices, Banxico stated that inflation remains below its 3.0% target. Finally, regarding the variables the Bank is watching in order to decide whether to hike or maintain the interest rate, Banxico kept them in the same order of importance: its first priority is with monitoring inflation and, in particular, the dynamics in the currency, followed by monetary conditions in the U.S. and the degree of slack in the economy. The next monetary policy is scheduled for 5 May.
Author: Ricardo Aceves, Senior Economist