Bank of Mexico

February 4, 2016

Mexico’s overnight interest rate had been raised on December 18 for the first time since before the Great Recession. The hike was 25 basis points in size to 3.25%.  At the end of 2008, the key overnight central bank interest rate had been at 8.25%.  By July 2009 and seven reductions later, it was at 4.5%.  Two more 25-bp cuts in September and October of 2013 were sandwiched by 50-bp reductions in March 2013 and October 2014, and the rate had stood at 3.0% until the hike this past December. 

The first policy meeting of 2016 did not raise the rate further.  But a released statement today by officials concedes that the balance of inflation risks has deteriorated because of peso depreciation.  So far, there do not seem to be second-order price hikes among non-tradables, but central bank officials admit that is a danger.  Inflation is at 2.5% and likely to move above the medium-term target of 3.0%.  December’s rate increase followed the Fed’s tightening, which without a Mexican response might have subjected the peso to even heavier selling pressure.  Another Fed rate increase in March seems much less probable than it did back in December.  However, the text of the Bank of Mexico’s statement suggests that officials will not entirely take their cue from the Fed.  If the peso loses significant additional ground and/or evidence emerges that peso depreciation is infecting Mexico’s inflation path more than desired, the Bank of Mexico seems likely to tighten its stance further.

Copyright 2016, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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