Thursday, March 26, 2015

Mexico maintains rate as risks to growth deteriorate

    Mexico's central bank maintained its benchmark overnight rate at 3.0 percent, as expected, saying the balance of risks to inflation and global economic growth have remained unchanged since January while the balance of risks to the country's economic growth had deteriorated.
    The Bank of Mexico, which cut its rate by 50 basis points in June 2014, said expectations for inflation in 2015 had declined although the effect of the peso's depreciation has been as expected without generating second-order effects. Medium and long-term inflation expectations remain anchored around the central bank's 3.0 percent target.
    Headline inflation in the first half of March eased slightly to 2.97 percent from February's 3.0 percent and the central bank reiterated from its most recently quarterly report that inflation will remain close to 3.0 percent in coming months and end the year slightly below that level. By 2016 headline inflation is also expected to remain close to 3 percent.
     Economic activity in Mexico has been "somewhat weak," the central bank said, noting a slowdown in exports due to slower growth in U.S. manufacturing at the beginning of the year along with slower oil production which has impacted industrial production.

    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 world economy has continued to show weak performance, although recently the decline in international oil prices could mean a net support for global growth, mainly for advanced economies. In the United States the dynamism of the economy slowed in the first months of the year, reflecting in part from temporary factors, but also because of the widespread appreciation of the dollar. The labor market continues to recover, although not yet observed wage pressures. Inflation remains at a level well below the goal of the Federal Reserve, but the expectations are that gradually return to a gradual upward trend toward said target. This institution has reiterated that future monetary policy actions depend on the evolution of economic activity, labor market and inflation. In its last meeting, the market perception is that the initial upward in the federal funds rate movement may be delayed with respect to the provisions so far. In the euro area at the beginning of March, the European Central Bank deepened its accommodative monetary stance, to start mass purchase securities, including government. While the margin has improved the performance of economic activity and inflation in that area, the possibility of deflation has not disappeared. In emerging economies, in an environment of high volatility, growth prospects have been revised downwards and prevails the risk that the recent slowdown intensified by the possibility that conditions in the financial markets become more stringent. In sum, the balance of risks for the growth of the world economy and for inflation remain unchanged from the previous meeting.

The expectation tightening of monetary policy in the United States sometime this year, combined with the current looser stance in the euro area and Japan, resulted in an increase in volatility in international financial markets in recent weeks. This manifested itself in additional depreciation of most currencies against the US dollar, including the Mexican peso. This latter phenomenon, under the vigilance of the authorities, has been reflected in increases in interest rates in Mexico to all terms. While these adjustments eased after the most recent announcement of monetary policy of the Federal Reserve can not be excluded a further increase in international volatility and that this has effects on the peso, especially given the uncertainty about the start of the normalization monetary stance in the United States. Therefore, it is of great importance that a sound macroeconomic framework is maintained in our country, both fiscally and monetarily.

Economic activity in Mexico has had a somewhat weak performance. Exports registered a slowdown at the beginning of the year, mainly due to a moderation in the pace of growth of manufacturing activity in the United States. Additionally, continues with a reduction in oil production platform, which has contributed to slower growth in industrial production. For its part, investment continues to present a moderate recovery, while some of the most relevant indicators related to consumption continue to show little effect. In this environment, conditions prevail slack in the labor market and the economy in general, so that no generalized price pressures from aggregate demand are anticipated. Given the above, it is considered that the balance of risks to growth has deteriorated.

The evolution of inflation during 2015 was favorable, reaching 3 percent in February and 2.97 percent in the first half of March. This is because increases in the prices of goods and services in the core component have been lower than in previous years and declines in the prices of some items of non-core component. So far, the effect of the depreciation of the domestic currency price has been as planned, reflected mainly in the prices of tradable goods, without having generated second-order effects. In line with this, inflation expectations for the end of 2015 have declined, while those for horizons of medium and long term remain anchored.

As noted in the most recent quarterly report, it is expected that annual headline inflation will remain close to 3 percent in the coming months and will close the year slightly below that level. Regarding core inflation is expected to continue below 3 percent throughout the year. By 2016, it is estimated that both overall and core inflation remain at levels close to 3 percent. Naturally, this forecast is subject to risks. On the upside, you can not rule out the possibility that the value of the national currency recorded episodes of additional depreciation and other supply shocks arising. On the downside, there is the possibility that economic activity in the country has a lower growth and further declines in the prices of telecommunication services and / or energy. In short, it is estimated that the balance of risks for inflation remains unchanged from the previous monetary policy decision.

Considering the above, the Governing Board has decided to maintain 3 percent target rate for overnight interbank interest under that estimates the current monetary stance is conducive to strengthen the convergence of inflation to the permanent target of 3 percent.
Currently, cyclical economic conditions show weakness, actual inflation is below target and inflation expectations are anchored. On the other hand, being highly integrated into the overall Mexican economy, particularly the United States, monetary policy actions in Nicaragua could have an impact on the exchange rate, inflation expectations and therefore on the dynamics of prices in Mexico. Therefore, the Board of Governors will remain attentive to the evolution of all the determinants of inflation and expectations for a medium- and long-term, but particularly on the monetary stance between Mexico and the United States, and the performance of the type exchange. He also will monitor the evolution of the degree of slack in the economy. All this in order to be able to take the necessary steps to ensure convergence of inflation target of 3 percent in 2015 and consolidate measures."


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