March 4, 2011 / 3:39 PM / 9 years ago

TEXT-Mexico central bank keeps benchmark rate unchanged

MEXICO CITY, March 4 (Reuters) - Mexico’s central bank held benchmark interest rates unchanged at 4.5 percent on Friday, as expected.

The following is an unofficial translation of the text of the announcement published on the central bank’s Web site:

Monetary Policy Announcement

The Board of Governors of Banco de Mexico has decided to keep at 4.5 percent the target rate for overnight interbank interest.

The global economic recovery continues, albeit with marked differences between countries and regions. The rebound in activity in advanced economies has been supported by both the external sector and domestic demand. U.S. economic activity improved, helped by fiscal and monetary stimuli. In Europe there are problems of fiscal and financial systems of several member countries of the Union. For their part, several emerging economies recorded robust growth. With respect to inflation, rising prices of various basic goods — a product of the abundant international liquidity, the higher growth rates, particularly in emerging economies, adverse weather conditions, as well as geopolitical conflicts in the Middle East and North Africa — represent an element of risk to global economic recovery and inflation in virtually all countries. In particular, in several emerging markets the combination of strong growth in spending with increases in raw material prices has raised inflation risks.

Productive activity in Mexico continues to show a positive trend. The acceleration of world economy and in particular the United States has been reflected in strong manufacturing export growth. In turn, domestic demand recorded a gradual improvement. More timely indicators show that private consumption remains a positive development, while investing more clearly shows a rising trend. As a result it is foreseeable that the output gap continues to close and the possibility persists that it turns positive by the middle of this year. However, various market indicators of production factors still exhibit slack. In particular, the unemployment rate, although it has fallen compared to 2009, during the last few months is still at relatively high levels and rates of growth of credit to households and businesses are just beginning to be positive, while the use of installed capacity is still below levels seen before the crisis.

The performance of inflation during the start of 2011 has been in line with the forecast of the Bank of Mexico. This result is due to, among other factors, the favorable performance of the exchange rate, the negative output gap, moderate cost pressures and the dissipation of the impact related to tax changes which came into force last year and the slower increases in rates authorized by local governments. The fall in inflation occurred despite the revision of tobacco tax and increased corn prices. Looking ahead, there are risks from the high degree of uncertainty about the future performance of international and domestic prices of grains and other commodities. In addition to pressures on prices of basic commodities from abroad, domestic prices are affected by the effects of the recent frost in Sinaloa and other Mexican states. There is also the risk that the noted geopolitical conflicts could generate portfolio reallocation and capital flows that could lead to pressure on the exchange rate. All of these factors hurt the balance of risks for inflation, although in 2011 we continue to expect it will be in line with the central bank’s last forecast.

Taking into account the above aspects, the Governing Board decided to maintain unchanged the target rate for overnight interbank interest. The Board will monitor the behavior of inflation expectations, output gap, public prices and with special care, the price of grains and other commodities as well as various determinants of inflation that could warn about unexpected generalized pressures on prices. Thus, if in the opinion of the Board, the latter eventuality materializes, the Central Bank will promptly adjust the monetary stance to ensure convergence of inflation to its ongoing goal of 3 percent. ( Editing by W Simon )

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