Friday, July 12, 2013

Mexico holds rate steady as downside growth risks rise

    Mexico's central bank held its benchmark target for the overnight rate steady at 4.0 percent, saying this policy stance is consistent with a lack of inflationary pressures,  slower economic growth and the fragile and volatile international financial markets.
    The Bank of Mexico, which cut its rate in March, said recent information suggest that the economic slowdown since the second half of last year "worsened significantly" in the second quarter of this year, reflecting lower exports and weak domestic spending.
    Like other emerging market economies, Mexico's peso has depreciated in recent months due to expectations of changes to U.S. monetary policy and long-term interest rates have "increased considerably," increasing the downside risks to Mexico's economy, the bank said.
    However, the central bank said the rise market interest rates and the decline in the peso had been in an orderly fashion and economic activity is expected to improve in the next half year, a slightly less pessimistic outlook than in its previous statement from June.
    Although the fall in peso will generate some inflationary pressures, the central bank was not overly concerned and said the overall balance of risks to inflation had improved with the slack in the economy limiting the transfer of exchange rate changes to overall prices.

    Mexico's inflation rate eased to 4.09 percent in June from 4.63 percent in May, and the central bank - known as Banxico - said it expects the downward trend to continue in coming months with inflation between 3 and 4 percent in the third and fourth quarters of this year.
    Next year, inflation is expected to be "very close to 3 percent" - the central bank's target - the same forecast the bank gave in June.
    Mexico's peso rose gradually in the first four months of the year but from early May to late June it fell by 10 percent against the U.S. dollar, along with other emerging market currencies, as major investors re-evaluated their exposure to riskier markets, withdrawing capital.
    But since June 24, Mexico's peso has rebounded and is largely unchanged from the beginning of the year, quoted at 12.82 to the U.S. dollar today compared with 12.84 on January 1.
    Mexico's economy slowed sharply in the first quarter with Gross Domestic Product up by only 0.45 percent from the fourth quarter, and annual growth of only 0.8 percent, down from a rate of 3.2 percent in the previous quarter, the slowest rate since the 2009 recession.


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