Friday, December 5, 2014

Mexico holds rate, sees inflation risk from peso drop

    Mexico's central bank held its benchmark interbank overnight rate steady at 3.0 percent, as expected, but cautioned that a "sustained depreciation of the national currency could represent and upside risk for inflation" although slack in the economy would offset some of that risk.
    The Bank of Mexico, which cut its rate by 50 basis points in June, added that several years of evidence showed a low transfer of exchange rate movements to prices and its effect on inflation has tended to be transient.
    Nevertheless, the central bank said the risks to inflation had risen since its previous meeting on Oct. 31. However, headline inflation is still expected to end the year around 4 percent and then drop further to around 3 percent by the middle of 2015.
    Core inflation is expected to end this year at around 3 percent and fall below that level in 2015.
    Mexico's headline inflation rate eased to 4.16 percent by mid-November from 4.3 percent in October while core inflation eased to 3.32 percent from 3.34 percent. The central bank targets inflation at 3.0 percent, plus/minus one percentage point.
    Mexico's peso has been depreciating since early September, trading at at 14.3 to the U.S. dollar today, down almost 9 percent this year.

    In addition to the risk to inflation, the central bank said the balance of risks to Mexico's economic activity had deteriorated, with private consumption not showing clear signs of recovery and the effects of government spending not fully materialized so there is slack in both the labor market and economy. However, exports continue to be favorable and investment has showed signs of recovery.
    Mexico's Gross Domestic Product expanded by 0.5 percent in the third quarter from the second quarter for annual growth of 2.2 percent, up from 1.6 percent in the second quarter.
    Last month the central bank lowered its 2014 growth forecast to 2.0-2.5 percent from the August forecast of 2.0-2.8 percent while the 2015 forecast was cut to 3.0-4.0 percent from 3.2-4.2 percent.

    The Bank of Mexico issued the following statement: (translation by Google)
    "The Governing Board of the Bank of Mexico has decided to maintain the 3.0 percent target for the overnight interbank interest rate to one day.

The global economy continues to show a weak but distinct behavior among major countries. In contrast, US economic activity has been consolidating its recovery, although the slowdown in other economies could moderate its dynamism. However, inflation and expectations have declined slightly, reflecting reductions in energy prices and so far there has been no upward pressure on wages. In this environment, the Fed has reiterated its plans to continue normalizing its monetary policy stance, emphasizing that specific moment that will increase its benchmark interest rate and the rate of subsequent increases will depend on the evolution of the economy. Production in the euro area and Japan has shown a slowdown, which is expected to central banks relax its monetary policy further.

For emerging economies, the decline in prices of raw materials, including oil, has exacerbated the downturn that has recently been observed in several of them. In sum, the balance of risks for the growth of the world economy has continued to deteriorate. It is anticipated that with the weak growth of the world economy, the fall in prices of basic and low inflation goods, the monetary stance in most advanced economies and some emerging will remain accommodative in subsequent quarters .

In recent weeks an overall depreciation of the currencies of both emerging and advanced against the US dollar, including the Mexican peso was recorded. This was mainly due to the expectation of a more restrictive monetary policy in the US, as well as the slowing global economy and the consequent fall in the terms of trade of many countries. In the case of Mexico, so far these movements have occurred in an orderly manner, with appropriate levels of operations and liquidity. The depreciation of most currencies of emerging countries has not yet been reflected in higher levels of interest rates market. However, taking into account the above elements, it can not be excluded that in future volatility in international financial markets intensifies.

Economic activity in Mexico showed a slower rate of growth during the third quarter. Although exports have continued to evolve favorably and private investment has shown signs of recovery, private consumption remains unregistered clear signs of recovery and the effects of government spending on economic activity is not fully materialize. Reflecting this, there are still slack conditions in the labor market and the economy in general, so that no generalized inflationary pressures from aggregate demand are anticipated. Taking into consideration the slowdown that have recently introduced the global economic activity and the country as well as recent social events in the latter, it is considered that the balance of risks to economic activity has deteriorated over the previous policy decision monetary.

After unanticipated increase in annual headline inflation in recent months, the trend has been maintained in accordance with expectations, decreasing from 4.30 percent in October to 4.16 percent in the first half of November. Meanwhile, annual core inflation remained around 3.30 percent. This decrease in inflation, the stability of their expectations for a medium- and long-term returns from surveys and reducing those extracted market information suggests that the process of pricing has not been contaminated by high inflation in recent months. Thus, it is estimated that annual headline inflation close around 4 percent in 2014, which in early 2015 was considerably reduced and remain around 3 percent from midyear. In this context, an increasing evolution of real interest rates in the short term in the following months, even if it is modified in that period, the target for the benchmark interest rate is expected. For core inflation is expected to end 2014 about 3 percent and in 2015 will be below that level. This forecast is based, among other factors, in the fading effect of tax changes that took effect at the beginning of 2014, the elimination of charges for domestic long distance telephone and lowest expected increase in gasoline prices from 2015. despite the evidence of several years that the transfer of exchange rate movements to prices is low and its effect on inflation tends to be transient, sustained depreciation of the national currency could represent an upside risk for inflation, although this risk is offset in part by the prevailing slack in the economy. On balance, it is estimated that risks to inflation increased from the previous decision.

Considering the above, the Governing Board has decided to maintain 3 percent target rate for overnight interbank interest under that estimates the monetary stance is consistent with the efficient convergence of inflation to the target 3 percent. Forward, 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 effects that the implementation of structural reforms might have on aggregate supply and demand of the national economy and the monetary stance on Mexico versus the United States. All this in order to be able to achieve the goal of marked inflation."


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