Banco de Mexico board of governors keeps overnight interest rate at 3%

By Caroline Salls

Pittsburgh, Sept. 5 – The board of governors of Banco de Mexico elected to keep the bank’s overnight interest rate at 3%, according to a news release.

The board said growth of the world economy experienced a recovery during the second quarter, although the strength of economic activity shows major differences between the major advanced economies and the emerging economies.

In particular, the bank said economic activity and employment in the United States have continued to strengthen, although various indicators suggest that some slack still prevails.

Inflation in the United States has remained below the Federal Reserve’s long-term goal of 2%, the board said. In this environment, the bank said the Fed has issued mixed messages because although it continues to emphasize that the pace of normalization of the monetary stance will be gradual, it has also indicated that the variables used as reference have improved faster than expected.

According to the release, these messages, along with the worsening of some geopolitical issues, caused temporary turbulence in international financial markets.

The board said growth stalled in the second quarter in the eurozone, and the risks of deflation increased.

Meanwhile, the governors said the rate of growth in emerging economies has stabilized, although with significant differences between those economies.

On balance, the board said the risks to the growth of the world economy have improved. Given the still benign inflation outlook worldwide, the prevailing view is that the monetary stance will remain accommodative in the near future in major advanced economies and most emerging ones.

Meanwhile, the board said the Mexican economy experienced a significant recovery in the second quarter after the weakness witnessed in the previous two quarters.

This change was driven mainly by external demand, the bank said, although domestic also showed some recovery.

Despite the recovery, the bank said conditions remain slack in the economy, and a gradual reduction is expected.

The bank said annual headline inflation showed an increase in recent months. As a result of unexpected increases mainly in the prices of livestock products and some processed foods, headline inflation reached levels above 4%, the release said.

Despite the increase in headline inflation, the board said core inflation has remained close to 3%.

The bank said annual headline inflation is expected to end 2014 at around 4% and then approach 3% during the first half of 2015. The rate is expected to close 2015 around 3%.

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