MEXICO CITY Nov 30 Mexico's central bank kept
its benchmark interest rate at 4.5 percent on Friday, backing
away from a threat to raise interest rates soon.
The following is an unofficial translation of the central
The Board of Governors of Banco de Mexico has decided to
maintain the 4.5 percent target for overnight interbank interest
Global economic activity continues to show weakness. In the
United States, forward-looking indicators continue to point to
moderate growth, wherein the housing sector and other indicators
have improved. However, the job market recovery has not been
Additionally, the possibility of a severe fiscal adjustment
in 2013 is affecting domestic demand, particularly private
investment. In the euro area, economic activity continues to
contract and in 2013 is expected to continue to show great
weakness. In the face of this, the fiscal sustainability
indicators of several euro zone countries have deteriorated.
Uncertainty about the outlook for global economic activity has
led to prevailing volatility in international financial markets.
In some of the major emerging economies, including China,
the growth rate appears to be stabilizing after a slowdown in
previous months. On balance, significant downside risks to
global economic growth remain. Meanwhile, due to the slowdown in
the economic activity and lower commodity prices, it is expected
that in most countries inflation exhibits a downward trend in
the remainder of the year and during 2013. In this environment,
it is expected that further monetary easing takes place in some
advanced and emerging economies.
Economic activity in Mexico has maintained an upward trend,
albeit at a more moderate pace than in previous quarters. This
reflects in part the slowdown in manufacturing exports and its
effect on production in this sector and the services most
related to it. While domestic demand is still showing a positive
trend, some factors determining consumption and investment have
also begun to slow. In this context, the output gap has remained
around zero, while a recovery has been observed in the labor
market. All in all, based on developments abroad, in particular
the U.S. economy, the view is that downside risks to Mexican
economic growth have increased marginally in the short term.
Overall inflation in our country showed a turnaround in
September after the increase registered since April due to the
occurrence of a series of supply shocks. In fact, the recent
decline in inflation has been remarkable. In particular,
although it is still above the upper bound of the range of
variability of plus or minus one percentage point around the
target of 3 percent, it is likely to finish at the end of the
year below 4 percent. The turnaround in inflation was due to
lower contributions from core and non-core components.
Core inflation reached its highest level of the year in
August and its decline in recent months is due, first, to a
break in the upward trend seen in the annual growth rate of the
goods subindex. Also helping has been the appreciation that the
exchange rate recorded since mid-year, particularly after the
announcement of further monetary easing in the United States
(QE3) and the euro area. The referenced change in trend also
paid off in a significant drop in the prices of some services.
Even the annual variation of the services subindex, which is
what best reflects the domestic determinants affecting inflation
has fallen to record lows, reaching close to 2 percent. In the
case of the non-core price subindex, the decrease in the rate of
annual change is due to lower growth rates in the sub-indices of
agricultural and energy prices.
Considering that the rise in inflation in recent months was
mainly due to shocks of a transitory nature, that there is no
evidence of a process of generalized price increases, as well as
that there have been no new shocks and that the forecast trend
changes in general and core inflation appear to be confirming
themselves, the Board of Governors has decided to maintain
unchanged the target for the one-day interbank interest rate.
However, if new shocks to inflation arise, even if they seem to
be transient, and the trend change in overall inflation and core
inflation is not consolidated, the Board believes that it could
be appropriate to raise the benchmark interest rate in order to
strengthen the anchoring of inflation expectations, prevent
contamination of the rest of the price formation process in the
national economy and not compromise the convergence of inflation
toward the permanent target of 3 percent.