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

By Caroline Salls

Pittsburgh, April 25 - 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 has continued a moderate recovery, mainly driven by some advanced economies.

The bank said the more dynamic economy resumed in the United States after weakening was observed at the beginning of the year largely as a result of climatic factors.

Economic activity in the United States will continue to strengthen in the coming months and, although inflation is expected to remain low, the Federal Reserve will continue with the gradual process of normalizing monetary policy, the release said.

Consequently, the bank said uncertainty surrounding international financial markets has decreased in recent months. The board said capital flows have been renewed in the emerging markets and accentuated in countries in the periphery of the euro area.

In this area, the governors said that the recovery remains fragile and that inflation rates will remain very low for an extended period, with a risk of deflation in some countries.

According to the release, growth expectations have continued to be revised downward in emerging markets, mainly reflecting the evolution of domestic demand and a slowdown in China. The board said conditions in the financial markets of these economies have stabilized recently, partly because of policy response, but mainly because of a more favorable perception of monetary policy in the United States, which could change.

On balance, the board said the outlook for global economic growth has improved marginally, overriding some downside risks, while 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.

Available information on first-quarter economic activity in Mexico suggests a lower-than-expected growth a few months ago, according to the release, but the board said some components of demand have begun to show a more favorable performance.

In particular, the board said exports and public spending have been more dynamic, and an early improvement was seen in some indicators of private consumption and investment.

Although new jobs have been created, the governors said ample slack remains in both the labor market and the economy as a whole.

As expected, the board said annual headline inflation has fallen since the second half of January, settling at levels well below 4%. The governors said the trajectory of annual core inflation has also been favorable, with record lows seen in February and March.

The board said changes in relative prices that occurred in late 2013 and early 2014, including those derived from tax measures, did not lead to second-order effects on the process of price determination in the economy.

Reflecting this, the governors said inflation expectations for the current year have been revised downward, falling below 4%, while those for longer-term horizons have remained stable.

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