Mexico and Chile Monetary Policy Reviews

July 17, 2010

The Mexican overnight interbank funding rate, 4.5% since July 2009, was left unchanged as expected on Friday.  The rate was reduced in total by 375 basis points last year.  The Mexican economy is recovering, but on-year first-quarter growth of 4.3% was just half as much as in Brazil and five-eighths as much as in Argentina.  While Mexican exports and industrial production are climbing briskly, domestic demand -– both consumption and investment -– have responded slowly, and the economy has supply-side slack and contained inflation expectations.  The CPI was unchanged on month in June and up only 3.7% on year.  Core was 3.9%.  Both should trend lower, and officials believe their 3.0% CPI goal at end-2011 will be met.  While again pledging to watch and react to any acceleration suggested by leading gauges of inflation, Bank of Mexico officials show no sense of urgency and are expected to trail their Latin American counterparts in getting around to tighten monetary policy.  A possible U.S. slowdown is a risk factor central bank officials need to watch.

The Central Bank of Chile’s Policy Board has now implemented two 50-basis point increases of its key interest rate on June 15 and then July 15.  The rate is now 1.5% compared to 0.5% from July 2009 through June 15, 2010 and 8.25% at the end of 2008.  600 basis points of reduction were administered in the first quarter of last year.  Officials indicated that more tightening will be coming as conditions warrant, observing that both domestic demand and production are showing significant dynamism.  High copper and oil commodity prices make Chile’s external environment favorable.  GDP growth is hovering around 5%, but retail sales are over 20% higher than a year ago.

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

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