Mexico's central bank maintained its benchmark target for its interbank overnight rate at 3.0 percent, as expected, saying the balance of risks for inflation and economic activity were unchanged from its previous monetary policy decision in September.
The Bank of Mexico, which surprised markets by cutting its rate by 50 basis points in June, said it still expects annual headline inflation to end this year around 4 percent and converge toward its 3.0 percent target by the middle of 2015.
Although the downside risks to global growth had intensified, the central bank said the balance of risks to Mexico's economy remained unchanged due to the prospects for the U.S. economy and the effects of the country's structural reforms that have recently been carried out.
And while global financial markets have been volatile recently, the bank said changes in Mexican financial markets had been of lower magnitude than in other emerging market, with only marginal increases in Mexican interest rates and orderly price movements.
However, the central bank said it would not rule out possible higher volatility in the future.
Mexico's headline inflation rate rose to 4.22 percent in September form 4.15 percent in August but the central bank said this was mainly due to higher prices for livestock products and some processed foods that use this as inputs.
Core inflation, however, has remained close to the 3 percent level, the bank said, and inflation expectations remain very close to 3 percent. Mexico's core inflation rate eased to 3.34 percent in September from 3.37 percent in August.
The Bank of Mexico issued the following statement: (translation by Google)
"The Governing Board of the Bank of Mexico has decided to keep the 3.0 percent target for the interbank interest rate overnight.
Recent developments in the global economy has shown new signs of weakness. While economic activity in the US continues to consolidate the recovery process after recording strong growth in the second quarter, the slowdown in the global economy and the appreciation of the dollar, among other factors, could moderate growth in 2015. this, together with the recent decline in inflation and prospects has led since our last statement at a market expectation of a postponement of the starting date of the elevation of the benchmark interest rate from the Federal Reserve, though persists uncertainty about it. In the euro area has been a marked slowdown in economic activity along with further reductions in inflation, which puts this well below the ECB target. This has led to a new round of monetary easing by the central bank said, although no apparent results, which has affected the expectations. Meanwhile, growth in several emerging economies continued to slow, highlighting what happened in China and Brazil. The balance of risks for growth in the global economy has deteriorated. While still an expectation that the difference between the monetary stances in major advanced economies will be accentuated in the medium term, it is expected that at the prospect of slower global growth, falling prices of basic commodities and low levels inflation, the monetary policy stance in most of the advanced and emerging economies will remain accommodative in the following quarters.
The described economic environment, coupled with the persistent geopolitical risks and the alarm caused by the evolution of the epidemic of Ebola has been reflected in a significant increase in volatility in international financial markets, significant declines in the prices of some raw materials and, in particular depreciation of the currencies of emerging economies. In the case of Mexico a moderate depreciation of the local currency against the US dollar, downward adjustment in the rate of the Mexican Stock Exchange, with marginal increases in interest rates was observed. So far these movements have occurred in an orderly manner, with appropriate levels of operations and liquidity. However, even when adjustments on financial variables in Mexico have been far lower magnitude than in most emerging economies, can not rule out the possibility of higher volatility in the future.
Economic activity in Mexico during the third quarter seems to have shown a modest recovery. This has been mainly contributed buoyant external demand, although domestic has also improved on its evolution in the first two quarters. They continue to observe conditions of slack in the economy, although it is expected that these conditions will continue to fall. No pressure on inflation perceived by the side of aggregate demand, or expected to be presented in the following quarters. Despite intensifying downside risks to growth in the world economy, the prospects for the evolution of the US economy, together with structural reforms recently enacted, makes the balance of risks to economic activity in Mexico remains the same from the previous monetary policy decision.
While the annual headline inflation has remained above 4 percent, the level is mainly explained by increases in the prices of livestock products and in some processed foods that use these as inputs. However, core inflation has remained at levels close to 3 percent. For their part, have remained stable inflation expectations for a medium- and long-term surveys from analysts and derivative market information, the latter being located very close to 3 percent.
As stated in the previous announcement of monetary policy, it is estimated that the annual headline inflation close around 4 percent in 2014, which at the beginning of 2015 present a significant decrease and converge to about 3 percent from mid last year. For core inflation is expected at the end of 2014 is close to 3 percent in 2015 and will be below that level. This forecast is based, among other factors, on the fading effect of the tax changes that took effect at the beginning of this year, at a lower rate of annual change in the price of gasoline, the impact of dilution changes mentioned in the previous paragraph relative prices and, of course, in the posture of monetary policy, which will ensure that changes in relative prices have no second order effects. While there are upside risks to the inflation trajectory, including the possibility of further currency depreciation as a result of volatility in international financial markets and increases in inflation above the minimum wage and increased productivity expected, there are also lower, and further declines in the prices of telecommunications services and the possibility of a less dynamic evolution of economic activity than expected if recent social developments in the country affecting the expectations of economic agents . However, it is estimated that the balance of risks for inflation remains unchanged from the previous decision.
Given the above, the Board of Governors decided to keep 3 percent target rate for overnight interbank rate, under which estimates the monetary stance is consistent with the efficient convergence of inflation to the target 3 percent. Going forward, it will remain attentive to the performance of all the determinants of inflation and expectations for a medium- and long-term. In particular, monitor the evolution of the degree of slack in the economy before the expected recovery, including the potential impact of implementing structural reforms and monetary stance relative to Mexico against the United States. All this in order to be able to reach the designated target inflation."