Banco de Mexico board of governors cuts overnight interest rate to 3%

By Caroline Salls

Pittsburgh, June 6 – The board of governors of Banco de Mexico elected to decrease the bank’s overnight interest rate by 50 basis points to 3%, according to a news release.

Taking into account the expected recovery of the economy and the relative monetary stance of Mexico with the United States to be achieved with this reduction in the benchmark rate, the board said no additional decreases in the target rate would be advisable in the foreseeable future.

The board said the growth of the world economy slowed in the first quarter.

In the United States, the bank said the performance of economic activity was weaker than had been planned for that period. Although the effects of the temporary factors that gave rise to this weakening have begun to fade and improvement was seen in the second quarter, the board said the growth forecast for 2014 has been reduced while inflation expectations remain at low levels.

In this context, the board said the Federal Reserve has reinforced the message that the normalization of monetary policy will be gradual.

The bank said recovery in the euro area remains fragile, and available information indicates that inflation rates will remain very low for an extended period. As a result, additional monetary stimulus measures were announced Thursday.

In the emerging markets, the board said economic activity continues to show weak growth rates, mainly reflecting the evolution of domestic demand and the slowdown in most developed countries and China.

International conditions better

The board said conditions in international financial markets have improved in recent months, reflecting the reduction of various risk premiums and the intensification of large capital flows from emerging economies.

In particular, the bank said decreases in interest rates and longer-term currency appreciation has been recently observed in many economies, including Mexico.

While there is still a risk for resurgence of volatility in international financial markets, the bank said that risk is estimated to be partially offset by the intention of the major central banks of the developed countries to mitigate volatility.

Mexican growth low

According to the release, the low rate of growth in economic activity in Mexico recorded in the last quarter of 2013 continued during the first three months of 2014.

The bank said the weak performance of the components of domestic expenditure, including consumption and private investment, has not been compensated for by an improvement in exports that began in the late first quarter and early second quarter.

Although production activity from April is expected to show a recovery, the board said economic growth in 2014 will be lower than expected just a few weeks ago.

Inflation details

In this environment of weak economic activity, the board said inflation has continued to decline, recently coming in at about 3˝%. As expected, the bank said annual core inflation has returned to near 3% levels, while the core price index has not shown a significant slowdown in annual growth rate since February as a result of the behavior of the sub-index of agricultural products.

As a result, the board said changes in relative prices that occurred in late 2013 and early 2014, including those derived from the tax measures, had second-order effects on the process of price determination in the economy.

Reflecting this, inflation expectations in the medium-term and long-term have remained stable and those for 2014 have declined, reaching clearly below 4%, the release said.

The board said the weak performance of the economy in the first quarter suggests a more moderate recovery than expected for the second quarter.

The bank said it is likely that annual headline inflation will be reduced to levels close to 3% from the first month of 2015, with core inflation below that level.

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