Mexico Central Bank holds Interest rates in the last week of January

31st January 2014

Mexico's central bank held its policy rate steady at 3.50 percent, as expected, but cautioned that it was keeping a close eye out for any signs of higher inflationary pressures or expectations in light of the recent rise in inflation and the risks to the peso' exchange rate from volatile international financial markets.
    Mexico's inflation rate jumped to 4.63 percent in early January, above the Bank of Mexico's 3.0 percent target, due to higher public transport prices and taxes, and the central bank expects inflation to remain above 4.0 percent during the first few months of this year before it declines in the second quarter and remains within the bank's acceptable range of between 2 percent and 4 percent.
    But the Bank of Mexico, which cut its target for overnight rates three times in 2013 by a total of 100 basis points, said it can't rule out that this temporary spike can lead to higher inflationary expectations, affecting the general price level, nor that the peso's exchange rate will be hit by volatility in global financial markets as they adjust to the reduction in asset purchases by the U.S. Federal Reserve.
    "The Board (of the central bank) will remain vigilant to all pressures that might affect medium and long-term inflation and expectations," the central bank said, and it is monitoring the implications of inflation forecasts on economic activity and the relative monetary stance of Mexico to the United States in order to achieve the bank's inflation target.
     Mexico's inflation rate started to pick up in November from a year-low of 3.36 percent in October, rising to 3.62 percent and then 3.97 percent in December, pushed up by higher transport prices and a seasonal rise in agriculture prices.
    The further rise in early January has mainly affected goods and services directly impacted by higher taxes on soft drinks, junk food and carbon-based fuel and not lead to any rise in other prices, the central bank said. Inflation expectations for 2014 have picked up due to the expected impact of taxes, but remained stable for 2015, it added.
    "This keeps the forecast in the sense that the recent increase in inflation will be temporary and will not affect the formation of prices in the economy," the central bank said.
    The central bank has on several occasions in recent months said inflation this year should rise temporarily due to these higher taxes but expectations are still stable for 2015. In 2015 the government will start linking fuel prices to inflation, instead of monthly increases, removing a major contributor  to inflation.
    But the balance of risks to the central bank's inflation forecast has deteriorated due to the major adjustment in capital flows to emerging markets, and thus the cost of funds for Mexico, from the process of normalizing U.S. monetary policy, the bank said.
    So far, Mexico's peso currency has fared better than many other emerging market currencies, down by only 2.6 percent this year to the U.S. dollar this year, trading at 13.39 to the dollar today. Last year the peso also weathered the drop in emerging market currencies much better than other currencies, falling by only 1.5 percent during the year, although it's largest decline came during May.
   Overall, the central bank said the outlook for global economic growth has improved, though emerging markets could face higher costs of external finance, which it said highlights the importance for them to maintain fiscal discipline.
    International commodity prices have continued to moderate in recent months and international inflation remains low.
    Mexico's economy is also continuing to recover and is expected to continue to improve, the bank said, due to improved external demand and a nascent recovery in some parts of domestic demand, such as private consumption and government spending. Investment, however, has not yet shown sign of improving.
    But better prospects for the U.S. economy could mean better demand for Mexico' products and structural reform measures could lead to better investment prospects in the medium term so the rate of economic growth can accelerate without generating inflation.
    Mexico's economy slowed sharply last year compared with the two previous years and in the third quarter of 2013 its Gross Domestic Product only expanded by a quarterly 0.84 percent after a contraction of 0.55 percent in the second quarter. Compared with the third quarter of 2012, third quarter GDP grew by 1.3 percent, down from 1.6 percent in the second quarter



Mexico holds rate, but keeps eye on inflationary pressures - Central Bank News

Mexico Central Bank too cuts rate 25 bps in the first week of September 2013

Mexico's central bank cut its target for the interbank rate by 25 basis points to 3.75 percent, a surprise to financial markets, saying economic growth this year and 2014 will be weaker than expected, putting downward pressure on inflation.

    The Bank of Mexico, which also cut its rate in March, said the downside risks to the economy had risen and growth this year will be "considerably" less than forecast, just as growth in 2014 will be below the forecast. In its latest quarterly inflation report released last month, the central bank cut its forecast for 2013 growth to 2.0-3.0 percent from a previous 3-4 percent.
    "On balance, there are prevailing risks to global economic growth and in this context, coupled with the absence of significant pressure on commodity prices, the outlook for global inflation is low," the central bank said, describing the global economy as having a mixed performance.
    Economic activity in Mexico slowed significantly in the second quarter, mainly due to a contraction of the industrial and services sectors, increasing the slack in the economy, and the central bank expects this to continue for an extended period. In addition, the government is also expected to make further progress in strengthening public finances.
    Mexico's Gross Domestic Product contracted by 0.74 percent in the second quarter from the first quarter for annual growth of only 1.5 percent, up from 0.6 percent in the first quarter, but well below growth in the previous three years.

     Mexico's inflation rate also fell more than expected to 3.5 percent in the first half of August, with core inflation below 2.5 percent, the bank said. In July, the headline inflation rate eased to 3.47 percent in July from 4.09 percent in June.
    While medium and long-term inflation expectations have remained stable, expectations for the end of this year have declined as the impact of recent supply shocks did not have second-round effects.
    "With regard to inflation risks in the short term, there is the possibility that the weakening of Mexico's economic activity is greater and more prolonged than expected and that could cause downward pressure," said the bank, known as Banxico.
    The central bank said in July that it expected inflation this year to be very close to its target of 3 percent, but said today that the slack in the economy points to lower-than-predicted inflation and even changes from a tax reform would only have a transitory impact and probably no second-round effects.
    The central bank noted the recent volatility and pressure on the currencies of emerging economies, including Mexico's, and higher medium and long-term interest rates due to the expected changes in U.S. monetary policy.

    "Mexico's sovereign risk, unlike other emerging economies, has remained stable after having increased in May and June, contributing to the strength of Mexico's macroeconomic fundamentals," the central bank said.
    Last month the central bank's governor, Agustin Carstens, said in Jackson Hole he thought the bank's monetary policy stance was adequate to reach the inflation goal as the peso was weakening and growth was slowing.
    In March the central bank cut its rate by a larger-than-expected 50 basis points but had stressed it was not embarking on a new cycle of easing. It has now cut rates by 75 basis points this year.
    Along with other emerging market currencies, Mexico's peso fell in May, but then bounced back in July before slipping in August. It was down almost 4 percent against the U.S. dollar since the start of this year, but rose after the rate cut, trading around 13.2 to the dollar

Mexico cuts rate 25 bps on slower growth and inflation - Central Bank News

for more details log on to Bank of Mexico website : http://www.banxico.org.mx/indexEn.html 

Mexico Central Bank holds rate steady as downside growth risks rise

Mexico's central bank held its benchmark target for the overnight rate steady at 4.0 percent, saying this policy stance is consistent with a lack of inflationary pressures,  slower economic growth and the fragile and volatile international financial markets.
   
 The Bank of Mexico, which cut its rate in March, said recent information suggest that the economic slowdown since the second half of last year "worsened significantly" in the second quarter of this year, reflecting lower exports and weak domestic spending.
    Like other emerging market economies, Mexico's peso has depreciated in recent months due to expectations of changes to U.S. monetary policy and long-term interest rates have "increased considerably," increasing the downside risks to Mexico's economy, the bank said.
    However, the central bank said the rise market interest rates and the decline in the peso had been in an orderly fashion and economic activity is expected to improve in the next half year, a slightly less pessimistic outlook than in its previous statement from June.
    Although the fall in peso will generate some inflationary pressures, the central bank was not overly concerned and said the overall balance of risks to inflation had improved with the slack in the economy limiting the transfer of exchange rate changes to overall prices.

    Mexico's inflation rate eased to 4.09 percent in June from 4.63 percent in May, and the central bank - known as Banxico - said it expects the downward trend to continue in coming months with inflation between 3 and 4 percent in the third and fourth quarters of this year.
    Next year, inflation is expected to be "very close to 3 percent" - the central bank's target - the same forecast the bank gave in June.
    Mexico's peso rose gradually in the first four months of the year but from early May to late June it fell by 10 percent against the U.S. dollar, along with other emerging market currencies, as major investors re-evaluated their exposure to riskier markets, withdrawing capital.
    But since June 24, Mexico's peso has rebounded and is largely unchanged from the beginning of the year, quoted at 12.82 to the U.S. dollar today compared with 12.84 on January 1.
    Mexico's economy slowed sharply in the first quarter with Gross Domestic Product up by only 0.45 percent from the fourth quarter, and annual growth of only 0.8 percent, down from a rate of 3.2 percent in the previous quarter, the slowest rate since the 2009 recession

Mexico holds rate steady as downside growth risks rise - Central Bank News

for more details log on to Bank of Mexico website : http://www.banxico.org.mx/indexEn.html