Banco de Mexico governors again keep overnight interest rate at 4½%

By Caroline Salls

Pittsburgh, Aug. 26 - The Board of Governors of Banco de Mexico left its overnight interest rate at 4½% at its meeting on Friday, according to a news release issued by the bank.

The board said the environment had deteriorated significantly in recent weeks.

In Mexico, the board said production activity is a positive trend, but the pace of growth has lost some momentum.

Some components of domestic spending have slowed moderately, the bank reported, but exports remain strong.

However, the board said the prospects for growth have been revised downward, largely in response to the slowing U.S. economy.

This confirms that the output gap closes at a slower rate than expected, as various indicators of labor and credit markets and the reduced current account deficit remain slack.

Therefore, the board said it does not expect widespread pressures on prices in the economy.

The bank said domestic financial markets reflected the international volatility, as interest rates in Mexico declined for almost all maturities to such an extent that Cetes terms up to a year are below the reference rate of the Bank of Mexico.

The board said this reflects the significant reduction in interest rates in the United States, coupled with the fact that the evolution of inflation and expectations have been favorable and anticipate a slowdown in the Mexican economy.

According to the release, the latest information about the U.S. economic activity shows that growth has been weak during most of 2011, maintaining the structural problems of unemployment, debt of households and the housing market.

The board said growth expectations for 2011 and 2012 has been revised substantially downward as a result.

Banco de Mexico said the prospect of lower growth in the advanced countries has facilitated the reduction of the prices of raw materials, so inflation in those economies is expected to begin to decrease.

The board said it will monitor the factors of inflation that might indicate widespread price changes.

The bank has kept the rate steady since July 2009.

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