Banco de Mexico board of governors cuts overnight interest rate to 4%

By Caroline Salls

Pittsburgh, March 8 - The board of governors of Banco de Mexico reduced its overnight interest rate by 50 basis points to 4%, according to a news release issued by the bank.

Until Friday's reduction, the bank had kept the rate at 4½% since July 2009.

The board said this change recognizes medium-term achievements in curbing inflation and facilitates the adjustment of the economy to a lower stage of economic growth and inflation.

The governors said this measure does not represent the beginning of a cycle for lowering the interbank interest rate benchmark, but supports an expansion of spending in the economy according to the potential for growth and convergence of inflation to the permanent rate objective of 3%.

According to the release, the global economy continues to show signs of weakness.

The bank said the United States expects growth in 2013 to be less than in 2012, with major downside risks.

The board said the recovery of economic activity and employment, supported largely by monetary policy, is being affected by the need for fiscal consolidation.

In the euro zone, the governors said economic activity continues to show signs of recovery, but uncertainty remains about the effect the needed fiscal adjustment, cleaning up the European financial systems and the possibility of further political instability will have on the economic recovery.

In addition, the board said the growth of emerging economies has slowed, but there are still differences between regions.

In an environment of slower economic growth with downward trajectories in international prices of most raw materials and providing for lower levels of inflation, the bank said it expects monetary policy to remain accommodating in many advanced and emerging economies.

The board said various indicators of economic activity in Mexico have also begun to slow down.

The bank said this was first evident with the evolution of external demand components and more recently in corresponding internal demands.

In the current environment, the governors said they expect the economy to continue to grow without introducing generalized inflationary pressures.

As expected, the bank said, headline inflation showed an increase in February after a significant decline in recent months. The board said this increase is expected to be temporary.

Meanwhile, the governors said the forecast for core inflation remains close to 3% and even lower for most of 2013 and 2014.

Although the highest inflation rates are expected in the short term, the bank said this will not affect the path of inflation in the medium term.

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