Mexico: Central Bank leaves interest rates unchanged for second consecutive meeting
May 5, 2016
On 5 May, the Central Bank announced that it had decided to maintain the overnight interest rate at 3.75%, which was on par with market expectations. The Central Bank has held four policy meetings so far this year. In a February meeting that was not part of the original schedule, the Bank announced a surprising 50-basis-point increase in the policy rate. The rate hike was part of the battery of changes that the Central Bank and the Ministry of Finance announced that represent major changes to the economic policy framework.
In its May meeting statement, the Central Bank did not alter its narrative substantially compared to its last statement, which was delivered in March. However, Mexican monetary authorities showed more concern this time about the global economic outlook versus the domestic outlook. According to the Bank’s Board, the growth outlook for the global economy has been revised downward again and concerns are mounting regarding global market dynamics, international monetary policy and its effectiveness, as well as the economic deterioration in Latin America. A particular downbeat tone was observed in the Bank’s description of the U.S. economy; recent economic indicators suggest that it decelerated notably in the first quarter of the year.
The Central Bank appeared to be less concerned about the domestic economy and its assessment was more upbeat than in previous statements, although it did not upgrade the country’s growth outlook. In its statement, the Bank signaled that recent data show that growth strengthened in the first quarter and stressed the gradual reduction in economic slack and the favorable performance of consumption and services in this period. On the downside, the Central Bank acknowledged its concerns regarding the external sector, but recognized that the external environment continues to be unfavorable, which is in line with authorities’ view of “stagnant global trade”. Regarding the evolution of consumer prices, the Central Bank said that the lingering negative output gap in the economy is not causing demand-side inflationary pressures. Echoing these developments, the Bank stated that it is still confident that inflation expectations remain anchored to its medium-term inflation target of 3.0%.
Overall, the balance of risks remained unaltered relative to the previous meeting in March and, 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 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. As Gabriel Lozano, Chief Mexico Economist at JP Morgan stated:
“In fewer words, there was no meaningful change to prior communication—despite the downgrade to global conditions—as inflation and local growth risks remained unchanged. There is no reason to believe that Banxico has any urgency to alter its policy, and we believe the central bank is willing to sit on its hands unless the peso resumes its depreciation and contaminates inflation dynamics or the Fed increases its policy rate. We see two 25bps hikes this year (August and December), following similar hikes by the Fed in July and December.”
Author: Ricardo Aceves, Senior Economist