Banco de Mexico board of governors ups overnight interest rate to 3¼%

By Caroline Salls

Pittsburgh, Dec. 17 – The board of governors of Banco de Mexico decided to increase the bank’s overnight interbank interest rate by 25 basis points to 3¼%, according to a Thursday news release.

The bank said its decision to increase the overnight interest rate is mainly in response to the 25 bps increase in the target range for the reference rate of the Federal Reserve, which could lead to depreciation if the Mexican rate is not increased.

The board said the global economy remains weak, highlighting the slowdown in emerging economies and the slow growth of the euro area and Japan.

Economic activity in the United States continues to expand, according to the release, particularly with strong private domestic demand, although industrial activity is depressed as a result of the widespread appreciation of the dollar and reduced global demand.

The bank said the U.S. labor market continues to show a recovery, particularly in the service sector, and signs of higher wage growth are seen.

In addition, the board said inflation remains low, reflecting the evolution of energy prices and the appreciation of the dollar. However, the Fed expects inflation to rise to near its goal in the next two years. In this environment, the Fed recently increased its policy rate and said the subsequent increases will be gradual and will continue depending on the observed and expected labor market developments and inflation.

For its part, the board said the European Central Bank further eased its monetary stance to face a weaker inflation dynamic than expected and support the growth of the region. This has contributed to a greater divergence between the positions of monetary policy in advanced economies, according to the release.

Economic activity slow

The governors said economic activity in most emerging economies continued to slow, partly because of the continuing decline in the prices of basic commodities and the slowdown in China, while the behavior of inflation has been divergent.

The bank said China has increased the expectation of additional monetary stimulus, while in some other emerging economies monetary policy stances have been restricted to clear inflationary pressures.

The board said the international financial markets recorded an increase in volatility in recent weeks in the context of observed and expected greater divergence in monetary policies of the major advanced economies and further declines in the prices of raw materials, especially oil.

According to the release, this has led to additional generalized depreciation of the currencies of emerging economies against the dollar. In the case of Mexico, the board said it has also registered a further depreciation of the Mexican peso, and interest rates increased in all terms.

The governors said it is therefore essential to maintain a sound macroeconomic framework in Mexico, requiring perseverance with fiscal consolidation efforts, timely adjustments to the stance of monetary policy and implementation of structural reforms.

Mexican economy grows

The bank said third-quarter growth in the Mexican economy was higher than expected and higher than observed in the first half of the year.

In this context, the board said private consumption continued to show greater dynamism, supported in part by a favorable labor market and low inflation, which has led to increases in wages. In turn, investment has continued an upward trend, the release said.

Meanwhile, the board said exports remained at a stalemate, with U.S. industrial activity weak and oil prices falling.

The board said the balance of risks for growth have improved compared to its previous monetary policy decision.

Inflation trend

Inflation has continued exhibiting a downward trend, reaching historic lows, which the bank said were even lower than expected.

So far, the board said the change in relative prices resulting from the depreciation of the exchange rate has proceeded in an orderly and gradual way, and the prices of goods, particularly durables, have continued to increase slowly.

The bank said expectations for headline inflation and underlying measures for the end of 2015 continued to decline to levels significantly below 3%, although they are approaching 3% for 2016 and 2017. Also, inflation expectations implicit in long-term market instruments remain anchored at almost 3%, the board said.

Both overall and core inflation are expected to close 2015 at about 2%, according to the release. By 2016, it is estimated that both measures of inflation will increase, reaching close to 3% in 2017.

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