Thursday, July 30, 2015

Mexico maintains rate, economy is weak and inflation low

    Mexico's central bank held its benchmark target for the overnight interest rate steady at 3.0 percent, as expected, but added that the economy continues to show weakness while headline inflation is expected to remain below the target in 2015.
    However, the Bank of Mexico added that "the possible monetary policy actions of the Federal Reserve could have additional repercussions on exchange rates, inflation expectations and the dynamics of prices in Mexico."
    The central bank will therefore remain attentive to inflation, the exchange rate, the slack in the economy and the monetary stance between Mexico and the United States, so it is in a position to take the necessary measures to strengthen the convergence of inflation to its 3.0 precent target.
    Mexico's inflation rate fell to less-than-expected 2.87 percent in June from 2.88 percent in May but the central bank attributed this to lower prices for energy, raw materials and services rather than the impact of a depreciation of the peso.
    Expectations for headline and core inflation by end 2015 and end-2016 have declined to an average of below 3 percent while long-run expectations remain well anchored, the bank said.
    Given the expected slack in the economy in coming quarters, the central bank expects overall inflation to remain below 3 percent for the rest of this year but then reach levels close to 3 percent in 2016. This forecast, however, is subject to upside risks from a depreciation of the peso and downside risks from lower economic activity, further decreased in energy prices and services, including telecommunications.
    Economic activity in Mexico continues to moderate, the bank said, with investment and exports deteriorating from the second half of last year while consumption has grown. The balance of risks to growth have deteriorated compared to the previous policy decision in June.
    The peso started declining in May 2014 and it has continued to drop this year as investors are concerned that a rise in U.S. rates will trigger an outflow of funds from emerging markets, such as Mexico, and into U.S. dollar assets.
    The peso was trading at 16.27 to the U.S. dollar today, down 9.4 percent since the start of 2015.


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