Banco de Mexico board of governors keeps 3¼% overnight interest rate

By Caroline Salls

Pittsburgh, Feb. 4 – The board of governors of Banco de Mexico decided to keep the bank’s overnight interbank interest rate at 3¼%, according to a Thursday news release.

The board said the world economy continues to weaken as a result of the sluggish growth of the advanced countries, a continuing slowdown in the emerging markets and a stagnation of world trade.

In the United States, the bank said gross domestic product growth declined during the fourth quarter, highlighting the weakness of its industrial sector, in particular its manufacturers, because of the generalized appreciation of the dollar and a lower global demand. The board said this contrasts with strength shown in the labor market.

Inflation remains low, the release said, and some measures of expectations have decreased, reflecting the renewed fall in oil prices and the appreciation of the dollar. However, the board said the Federal Reserve expects inflation to increase to levels close to their target in the medium term.

In this environment, the Fed maintained its monetary policy rate in January and stressed that the trajectory of subsequent increases will be gradual and will continue to depend on developments and expected employment and inflation.

In addition, the Fed said it will assess the global environment and its effect on the balance of risks to economic activity and inflation.

Recovery outlook

For its part, the bank said recovery in the euro area has been slow and fragile, and the downside risks to growth and inflation have been accentuated.

As a result, the European Central Bank opened up the possibility of greater relaxation of its monetary stance in March.

The governors said the Central Bank of Japan announced additional measures of monetary stimulus, further increasing the gap between the positions of the monetary policy of the advanced countries.

In the case of China, the board said there is still uncertainty about its financial strength, its prospects for growth and the effectiveness of the economic policies adopted.

As a reflection in part of the slowdown in the economy, the fall in the prices of raw materials and a greater restriction in the financing conditions for international markets, the bank said a vast majority of the emerging countries continued to experience weak growth.

Emerging countries vulnerable

According to the release, the international financial markets recorded a significant increase in volatility in the context of global growth and show clear signs of vulnerability in some emerging countries, including China, Brazil and Russia, as well as drops in the prices of raw materials, especially oil.

In Mexico, the bank said this environment led to a significant additional depreciation of the peso against the dollar.

The board said the global oil market still displays a significant structural imbalance between supply and demand, which suggests that prices could remain depressed for some time.

The governors said it is therefore essential to maintain a sound macroeconomic framework in Mexico to carry out the required settings in the public finances, to absorb the shock to government revenue, to modify the stance of monetary policy and to continue implementing proper structural reforms, in particular in the hydrocarbons sector.

The bank said the Mexican economy continued to show growth based on the behavior of private consumption in the fourth quarter of 2015. This has been reflected by the positive evolution of the labor market and low inflation, which has produced increases in real wages.

On the other hand, the board said manufacturing exports continued stagnate, while gross fixed investment fell.

The board said general inflation ended 2015 at 2.13%. In the first half of January, annual inflation showed an upturn to 2.48%.

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