Mexico: Banxico remains on hold but turns more hawkish on rising inflation
September 7, 2012
At its 7 September meeting, the Central Bank (Banxico) left the monetary policy rate unchanged at 4.50% in a decision expected by most market analysts. Banxico last adjusted interest rates in July 2009. The Bank commented that "global economic activity continues to show signs of weakness" and that downward risks to global growth have increased amid deleveraging and fiscal consolidation in Europe and uncertainty regarding the so-called fiscal cliff in the United States. Nevertheless, Banxico noted that Mexican economic activity continues to show dynamism, underpinned by favourable developments in the external sector. Banxico highlighted that "inflation registered an unexpected increase in recent months", mostly reflecting higher food prices. Although the Bank deemed the latter to be transitory and stressed that it remains confident that it will not translate into second-round effects, Banxico still acknowledged that short-term risks to inflation have increased. As a result, the Bank now expects inflation to remain above 4% in the months ahead before gradually converging to the permanent inflation target of 3%. Against this backdrop, the Bank turned more hawkish and even commented on the possibility of an interest rate hike. Monetary authorities stated that special attention will be placed in preventing second-round effects of higher agricultural prices and fluctuations in the exchange rate.