Thursday, August 11, 2016

Mexico maintains rate despite rising risks to growth

    Mexico's central bank left its key policy rate at 4.25 percent, as widely expected, but said the balance of risks surrounding the country's economic growth had deteriorated since the rate cut in late June while the outlook for global growth remains "depressed" as reflected in lower oil prices.
    The Bank of Mexico, which has raised its rate three times by a total of 125 basis points since the U.S. Federal  Reserve's tightening in December last year, noted estimates for Gross Domestic Product growth in the second quarter of this year showed a contraction of 0.3 percent from the first quarter, with stagnation in the industrial sector, slower private consumption, weak exports and investment that resulted in the output gap remaining negative.
    The central bank added that the exchange rate of the peso had shown "great volatility" in response to the decision by the U.K. to leave the European Union and new episodes of volatility in international financial markets could not be ruled out due to the geopolitical risks, the possible consequences of the U.S. Presidential election and the normalization of U.S. monetary policy.
    Given these uncertainties, the central bank said it was crucial to maintain sound macroeconomic fundamentals, including a consolidation of public finances to help absorb international shocks more efficiently and promote an adequate current account balance.
    As in recent months, the central bank said it was closely following all determinants of inflation, especially the exchange rate and its possible transfer to consumer prices, and will remain vigilant about the relative position between Mexico and the United States "without neglecting the evolution of the output gap."
    Mexico's inflation rate rose slightly to 2.65 percent in July from 2.54 percent in June, but was still below the central bank's 3.0 percent target.
    The exchange rate of the peso - the most traded currency among emerging market currencies - has been rising since the beginning of this month and was trading at 18.24 to the U.S. dollar today, up from a historic lows in June but down 5.7 percent since the start of this year.
    The central bank raised its rate in June to shore up the peso which fell sharply in response to the U.K. vote on the EU to a record low of 19.5 to the dollar the day after the vote.


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