Mexico Monetary Policy

Mexico

Mexico: Banxico stays put again, waits for the Fed to make the first move

October 29, 2015

Mexico’s Central Bank (Banxico) held a monetary policy meeting on 29 October during which it announced that it will keep the target of the overnight interest rate at 3.00%. The decision was widely expected by market analysts and the Bank’s explanatory statement didn’t include any surprises.

According to the Bank, the risks for growth have deteriorated slightly mainly due to sluggish growth in domestic demand and weaker external demand. The Bank explained that, although favorable developments in the labor market, higher remittances and low interest rates are buttressing consumption, investment remains weak, exports have lost dynamism and a degree of slack persists in the economy in general. Consequently, in its assessment regarding consumer prices, the Central Bank pointed out that inflation has touched historical lows and it does not expect inflationary pressures derived from domestic demand. The Bank added that the effects on consumer prices from the depreciation of the currency have been adjusting gradually and therefore it continues to expect inflation to end this year below 3.0% and to end 2016 around 3.0%.

As in previous statements, the Central Bank indicated that, although inflation is low and inflation expectations remain anchored, there could be pressure on inflation coming from a significantly weaker Mexican peso due to possible actions from the U.S. Federal Reserve (Fed). Therefore, the Bank emphasized that it will remain vigilant on the Fed’s actions (or inaction) and the relative monetary stance between the two monetary authorities. In a nutshell: If the Fed decides to hike its policy rate, Banxico will start raising rates.

Regarding Banxico’s monetary policy tactic, Benito Berber, Senior Latam Strategist at Nomura said:

“We believe the line about growth being softer than before is slightly dovish, given that domestic consumption remains fairly strong. We think that the board will wait for the Fed to move and then see what happens with the MXN before making a decision about hiking. Therefore, unless the MXN rallies with a Fed liftoff, we think Banxico is most likely to hike after the Fed starts increasing its policy rate.”

Although the majority of analysts surveyed for the LatinFocus Consensus Forecast believe that Mexico’s Central Bank will increase interest rates on the heels of the U.S. Federal Reserve’s increase, a few analysts still expect that the Banxico will leave interest rates unchanged this year. On average, the panel considers that the target of the overnight interest rate will end this year at 3.33%. For 2016, the group of panelists we surveyed expects the target of the overnight interest rate to end the year at 4.18%.


Author:, Senior Economist

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Mexico Monetary Policy October 2015 4

Note: Banxico target rate (Tasa objetivo de fondeo bancario) in %.
Source: Mexico Central Bank (Banxico).


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