Banco de Mexico board votes to increase overnight interest rate to 7¼%

By Caroline Salls

Pittsburgh, Dec. 14 – The board of governors of Banco de Mexico voted to increase the bank’s overnight interbank interest rate by 25 basis points to 7¼%, according to a Thursday news release.

The board said the world economy continued to expand in the fourth quarter in both advanced and emerging economies.

In the United States, the bank said economic activity is expected to grow at a solid pace, after being moderately affected by hurricanes during the previous quarter. In this environment, labor market conditions have continued to improve, and inflation remains below 2%, although the Federal Reserve continues to anticipate that it will gradually converge to that level, the release said.

The board said the global economy is expected to maintain a moderate expansion for the rest of 2017 and 2018, although this scenario continues to face downside risks, including uncertainty about the direction of economic policy and the possibility of more stringent monetary conditions in the major advanced economies, geopolitical risks and the possibility of adopting protectionist policies in various regions.

In this environment, the board said the price of the national currency has fluctuated at levels similar to those observed in the last monetary policy decision, while interest rates increased slightly.

According to the release, interest rate differentials between Mexico and the United States for the short and medium term decreased, while those for long-term horizons increased marginally.

The bank said the Mexican economy registered a contraction in the third quarter, reflecting both a slowdown that has been observed in some components of total demand since the end of 2016, as well as temporary adverse effects of earthquakes and the significant reduction in the oil production platform in September.

The balance of risks for growth continues to be biased downward, the release said, mainly because of the environment of uncertainty that has prevailed, especially in relation to the renegotiation of the North American Free Trade Agreement, which has considerably affected investment.

Given the complex environment that the Mexican economy continues to face, the board said it is important that the authorities persevere in maintaining the soundness of the country’s macroeconomic fundamentals.

In this context, both the monetary policy actions that have been implemented to keep medium-term and long-term inflation expectations anchored and achieve the convergence of inflation to its goal, as well as the commitment of the federal government to compliance with the fiscal targets for 2017 and 2018, have contributed to strengthening Mexico’s macroeconomic foundations, according to the bank.

The governors said inflation reached 6.66% in August and fell in the following two months, but the presence of new shocks meant that, as of November, general inflation showed an increase compared to September, going to 6.63% from 6.35%.

Core inflation also increased, coming in at 4.9% in November, up from 4.8% in September. The board said this behavior was mainly associated with an increase in the prices of non-food goods and a rise in the prices of services.

Inflation expectations at the end of this year rose between September and November to 6.5% from 6.3%, according to the release, although the medium-term and long-term expectations remained around 3.5%.

The bank said one member of the board voted to increase the target for the benchmark interest rate by 50 bps, while the others opted for the 25 bps increase.

© 2015 Prospect News.
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