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TEXT-Mexico's central bank holds interest rate at 4.5 percent
November 30, 2012 / 3:55 PM / 5 years ago

TEXT-Mexico's central bank holds interest rate at 4.5 percent

MEXICO CITY, Nov 30 (Reuters) - 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 bank’s statement:

The Board of Governors of Banco de Mexico has decided to maintain the 4.5 percent target for overnight interbank interest rates.

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 consolidated.

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.

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