Mexican Central Bank Keeps Benchmark Rate on Hold

Mexico’s central bank (Banxico) kept its benchmark rate unchanged at 4.5% at its March 4 meeting, in line with market consensus, including RGE’s expectations. In its communiqué, Banxico said that economic activity in advanced economies is now being driven by external demand and domestic consumption. With regards to global prices, the bank mentioned that numerous factors including high levels of liquidity, adverse weather conditions and the geopolitical conflicts in parts of the MENA region were driving costs upward and represent risks to the global economic recovery. In many emerging economies in particular, the rise in raw materials prices has increased the risk of inflation.

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Mexican Inflation (y/y) and Monetary Policy Rate Source: Banxico and RGE

As for Mexico’s economy, Banxico noted that economic activity continued on an upward path as U.S. demand for Mexican manufacturing goods has risen. Domestic consumption continues to be healthy and investment dynamics are improving relative to previous months. While the output gap is still expected to close in H2 2011, Banxico notes that several economic indicators show some looseness. Specifically, the unemployment rate, although lower than in 2009, is still at a high level; the credit growth rate for households and firms has just turned positive; and installed capacity utilization is still lower than pre-crisis levels.

Editor’s Note: This post is excerpted from a much longer analysis available exclusively to RGE clients, Inflation Expectations Likely to Decline in Brazil.