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

By Caroline Salls

Pittsburgh, March 26 – The board of governors of Banco de Mexico decided to keep the bank’s overnight interbank interest rate at 3%, according to a Thursday news release.

The governors said the world economy has continued to show weak performance, although the recent decline in international oil prices could mean a net support for global growth, mainly for advanced economies.

The bank said the dynamism of the U.S. economy slowed in the first months of the year, partially reflecting temporary factors, but also because of the widespread appreciation of the dollar.

The board said inflation remains at a level well below the goal of the Federal Reserve, but the expectations foresee a gradual upward trend toward that target.

In the euro area at the beginning of March, the European Central Bank deepened its accommodative monetary stance. While the margin has improved, the governors said the possibility of deflation has not disappeared.

In an environment of high volatility, the bank said growth prospects in emerging economies have been revised downward, and there is still a risk that conditions in the financial markets could become more stringent.

Mexican peso depreciates

According to the release, the expectation of a tightening of monetary policy in the United States sometime this year, combined with the current looser stance in the euro area and Japan, resulted in an increase in volatility in international financial markets in recent weeks.

The governors said this manifested itself in additional depreciation of most currencies against the dollar, including the Mexican peso, and interest rates in Mexico have increased.

While these adjustments eased after the most recent announcement of monetary policy of the Federal Reserve, the board said a further increase in international volatility could affect the peso, especially given the uncertainty about the start of the normalization of the monetary stance in the United States.

Therefore, the bank said it is of great importance that a sound macroeconomic framework is maintained in Mexico, both fiscally and monetarily.

Economic activity

The governors said economic activity in Mexico has had a somewhat weak performance. Exports registered a slowdown at the beginning of the year, mainly as a result of a moderation in the pace of growth of manufacturing activity in the United States.

For its part, the board said investment continues to present a moderate recovery, while some of the most relevant indicators related to consumption continue to show little effect.

In this environment, the bank said slack conditions prevail in the labor market and the economy in general, and no generalized price pressures from demand are anticipated.

Given these factors, the governors said the balance of risks to growth has deteriorated.

Inflation outlook

The bank said the evolution of inflation in 2015 was favorable, reaching 3% in February and 2.97% in the first half of March because increases in the prices of goods and services in the core component have been lower than in previous years and the prices of some non-core component items have declines.

Inflation expectations for the end of 2015 have declined, the board said.

Annual headline inflation is expected to remain close to 3% in the coming months and will close the year slightly below that level. Meanwhile, core inflation is expected to continue below 3% throughout the year. By 2016, it is estimated that both overall and core inflation will remain at levels close to 3%.

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