Bank of Mexico Retains 3.5% Overnight Lending Rate

January 31, 2014

Mexico’s central bank did not become the latest victim in an epidemic of emerging markets where central bank rates have been hiked to stem capital outflows, currency depreciation, mounting inflation worries.  To be sure, the peso has depreciated, and inflation has risen to 4.6% led by food and higher fiscal charges. But a statement from officials asserts that “the recent increase in inflation will be temporary and will not affect the process of formation of prices in the economy.”  Officials see no sign of second-order price hikes in response to inflation’s temporary rise.  Moderate 3-4% growth is projected, but such will not absorb the excess productive slick for some time to come.  Concern is express, however, that shifts in capital flows that have hammered other emerging markets might cause Mexico to deviate from the baseline forecast.  Relative to a medium-term inflation target of 3%, risks of not meeting such goal have “deteriorated” since the last policy meeting.  Hence, so has the Bank of Mexico’s ability to avoid joining other central banks in raising interest rates eventually. Allowing for such a possibility constitutes a departure from previous guidance that policy was unlikely to change in 2014.  In 2013, officials cut the key central bank rate three times by a total of one percentage point: 50 bps in March and 25 bps each in September and October.

Copyright 2014, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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