Banco de Mexico board of governors keeps overnight interest rate 3½%

By Caroline Salls

Pittsburgh, March 21 - The board of governors of Banco de Mexico elected to keep the bank's overnight interest rate at 3½%, according to a news release.

The board said the global economy showed a modest recovery in early 2014.

In the United States, the board said economic activity was lower than anticipated.

Even though inflation remains low in this economy given the relatively low utilization of productive resources, the bank said the Federal Reserve is expected to continue the sequential process of normalizing monetary policy. In this context, the board said financial market uncertainty persists about the details of the future actions of the Federal Reserve.

The bank said economic activity in the euro area has been recovering slowly, while downward pressures remain for inflation.

In addition, the board said expectations of growth in emerging economies have declined, mainly reflecting weak domestic demand and the relative slowdown in China. Additionally, the governors said some of these countries have faced difficult situations in their markets, given macroeconomic vulnerabilities, reductions in the rate of economic growth and the normalization of monetary policy in the United States.

On balance, the board said the outlook for global economic growth have improved, although major downside risks prevail. Meanwhile, the board said global inflation is expected to continue at low levels, and in the case of most advanced economies, even below the target of their central banks.

According to the release, economic activity in Mexico slowed in late 2013 and early 2014.

Even when public spending has been more buoyant, the board said exports and private consumption and investment do not show obvious signs of acceleration.

Meanwhile, although labor market conditions have continued to show a slight improvement in the Mexican market and the economy as a whole, the bank said slack conditions prevail.

As a result, the board said the margin the balance of risks to growth in economic activity has not improved markedly, and no inflationary pressures are perceived arising from the expected behavior of total demand.

After an increase registered by general inflation in the first half of January, the board said it began to decline in the second half of the month, but still remains above 4%. Annual core inflation also began to decline in the second half of January, returning to near 3% levels, the release said.

The governors said the price increases observed in the first month of the year, as expected by the Bank of Mexico, were concentrated in a small number of goods and services, and there have been no second-order effects arising from adjustments in relative prices that occurred in late 2013 and early 2014.

The board said this was reflected in a sharp decline in core inflation in February, and inflation expectations corresponding to shorter-term horizons have presented slight downward corrections. Meanwhile, expectations for 2015 and beyond have remained stable.

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