Banco de Mexico board of governors keeps overnight interest rate at 4%

By Caroline Salls

Pittsburgh, June 7 - The board of governors of Banco de Mexico kept its overnight interest rate at 4%, according to a news release issued by the bank.

The board said global economic activity has shown greater weakness so far this year, with significant differences between regions.

In the United States the bank said the bank said the latest indicators point to a continued recovery process, although those indicators have been mixed.

In the euro area, the board said information suggests that the region will continue in recession in the second quarter in the context of a slow unwinding of the financial system.

The bank said higher short-term economic growth prospects have been generated in Japan, as well as higher inflation, following the announcement of an unprecedented fiscal and monetary stimulus.

However, the bank said financial markets in that country have seen increased volatility in connection with questions about the implementation of monetary easing and the strength of the recovery.

The governors said the growth of emerging economies has moderated largely in response to the slowdown in advanced countries.

According to the release, significant downside risks to global economic growth still prevail.

In this context, coupled with lower raw material prices, the bank said a lower inflation outlook is expected in most countries.

Mexico activity slowed

The board said economic activity in Mexico has slowed significantly in 2013.

On one hand, the bank said weakness in external demand has continued, and manufacturing exports have been stagnant.

In addition, the latest information shows clearer signs that some components of domestic demand have reduced their rate of expansion, the release said.

The bank said the peso depreciated in domestic financial markets, while interest rates and long-term rates rose significantly, primarily in response to the expectation of changes in U.S. monetary policy.

The board said the downside risks to economic activity in Mexico have intensified.

The governors said the increase in headline inflation stemmed from a combination of a low comparison base, a change in seasonality arising from the revision of weights and the occurrence of clearly identified supply shocks, including adverse weather conditions affecting agricultural production, avian influenza outbreak and a review of public transport fares.

Meanwhile, the bank said core inflation has remained below 3% for several months, suggesting that despite the shocks, the price formation process has been consistent with the convergence of inflation in the medium term goal of 3%.

Inflation outlook

The board said prevailing monetary conditions have led to expectations that inflation will remain stable in the medium term and long term.

Given that the rise in headline inflation as a result of temporary factors, the board said a slight decrease is expected in June, and the downward trend is expected to intensify to settle between 3% and 4% in the third and fourth quarters.

By 2014, the annual headline inflation is expected to be close to 3%, while annual core inflation will remain below that level in most of 2013 and 2014.

The board said it decided to keep the overnight interest rate at 4% considering the slowdown the Mexican economy has shown in the early months of the year, the fragility of the external environment and recent developments in inflation and prospects.

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