Mexico: Central Bank cuts interest rates, closes door on additional easing
October 25, 2013
At its 25 October monetary policy meeting, Mexico's Central Bank (Banxico) decided to trim the overnight target interest rate by 25-basis-points to 3.50%. The move, which was broadly expected by the market, follows a similar 25-basis-point cut at the Bank's previous meeting. The Central Bank has cut the overnight interest rate by a total of 100 basis points in 2013 to date.
Banxico stated that, after having registered weak growth in the first half of the year, recent indicators suggest that economic activity improved in the third quarter as the negative impact of external shocks is gradually fading. Nonetheless, the Bank recognized that a considerable degree of slack remains in the labor market and in the overall economy. Regarding price developments, the Bank stated that inflation remains contained and that the recent hurricanes that affected several areas of the country did not have a significant impact on consumer prices.
The Bank concluded that inflation expectations for 2014 increased slightly, mainly due to the possible effects of the fiscal measures that were implemented in the fiscal reform. Moreover, the Bank underlined that, taking into account the fiscal policy for next year, the monetary stance is still in line with the expectation that inflation will settle at the Bank's permanent 3.0% target in 2014 and that additional reductions in the benchmark interest rate are not recommended for the foreseeable future.
The majority of LatinFocus Consensus Forecast panelists expect the Bank to stay put this year, leaving interest rates at 3.50%, with a Consensus average of 3.52%. For next year, panelists expect Banxico to tighten the reins, resulting in a 3.63% year-end projection.
Author: Ricardo Aceves, Senior Economist