Mexican Monetary Policy Stays on Hold as Expected

May 21, 2010

The Bank of Mexico retained a 4.5% benchmark interest rates, which represents a 6-1/2 year low.  The rate was cut in seven steps from 8.25% at the start of 2009 to its present level by last July.  Mexico is again achieving positive economic growth, but such is being powered almost entirely by net foreign demand while consumption growth and investment are relatively low.  Overall economic growth is lower than the estimate of potential economic growth, and both total and core CPI inflation fell in April.  In-target inflation is expected next year.  The target calls for a 3% CPI pace by the end of 2011.  A statement from officials observes an increased risk of default on sovereign debt of some European countries and concludes that “monetary policy in major advanced economies could continue for longer than markets anticipated a few weeks ago.”  The statement promises to watch for leading indicators of accelerating inflation such as a rise in expected inflation or a diminishing output gap and to react if and when needed to prevent a problem on the score.  But the overall tone of the statement conveys no sense of urgency to begin raising the Bank of Mexico’s key interest rate.  Other central banks in Latin America seem likely to act sooner.

Copyright Larry Greenberg 2010.  All rights reserved.  No secondary distribution without express permission.



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