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

By Caroline Salls

Pittsburgh, June 4 – 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 board said the U.S. economy shrank during the first quarter in response to temporary factors, including weather and port strikes, and other facts, including a slowdown in net exports in response to a widespread appreciation of the dollar and the decline in investment in the energy sector.

The bank said the labor market continues to be relatively favorable, and inflation remains at low levels. Inflation is expected to gradually increase to reach levels close to the 2% target, according to the release.

In this environment, the board said the Federal Reserve has continued emphasizing that its future monetary policy actions will depend on the evolution and expectations about economic activity, employment and inflation.

In response to the weakness of the economy in the first quarter and the revision of the expectations for the year as a whole, the bank said the first increase in the monetary policy rate is expected to be postponed and the pace of subsequent increases will be gradual.

International volatility

In the euro area, the board said economic activity continues to show a recovery, supported by an extraordinary monetary stimulus. In addition, the bank said inflation and expectations have risen.

Meanwhile, in many of the emerging economies, including China, the board said economic activity is still weakening, while inflationary pressures have declined, largely in response to the behavior of commodity prices.

The board said the international financial markets will continue to observe high levels of volatility derived from asymmetry in the current and expected monetary positions between United States and the area of the eurozone, Japan and China, as well as the problems of Greece and geopolitical factors.

According to the release, the price of national currency against the dollar fluctuated narrowly in recent weeks, but it could be affected in the coming months by a more uncertain international environment.

The board said domestic interest rates were lower than the external volatility, and it is essential to keep a solid macroeconomic framework in the country.

Moderate growth rate

Economic activity in Mexico continued to show a moderate growth rate, the release said. In terms of total demand, the board said non-oil exports showed some improvement in March and April, and some indicators of consumption seem to be registering a recovery, supported, in part, by the dynamics of the labor market, together with a favorable evolution of inflation.

On the other hand, the bank said investment recovery has lost vigor.

In the absence of demand side pressures over the past several quarters, the board said inflation has been located below 3% despite the depreciation of the national currency. In addition, the banks said reductions in the prices of energy and telecommunications have contributed, both directly and indirectly, to the favorable performance of inflation.

As a result, the governors said expectations for headline inflation at the end of 2015 and 2016 have been reduced, ranking even below 3%. However, expectations remain well anchored for longer-term inflation.

By 2016, the bank said both the underlying and headline inflation levels are estimated to be close to 3%.

© 2015 Prospect News.
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