Mexico Keeps Record-Low 3% Rate After Growth Risks Increased

Former Mexico Head Vicente Fox on Economy, Oil Prices
  • Fed inaction allows Banxico to keep stimulus to revive growth
  • Phone, gasoline prices keep inflation at lowest since 1960s

Mexico’s central bank kept its key interest rate unchanged at a record low for an 11th straight meeting to boost the nation’s sluggish economy, saying growth risks have increased after exports lost some of their momentum.

Banco de Mexico’s board, led by Governor Agustin Carstens, left the overnight rate at 3 percent on Thursday, as forecast by all 28 economists surveyed by Bloomberg. Mexico’s $1.28 trillion economy is showing mild growth amid slowing external demand, depressed oil prices, a reduction in crude output and low investment growth, the central bank said in the statement accompanying today’s decision.

Despite Mexico’s economic weakness and the lowest inflation in more than four decades, most economists forecast that the central bank will raise interest rates in December, according to a survey by Citigroup Inc.’s local unit. Expectations of an imminent increase in the U.S. sent the peso to a record low last month, and Mexico’s policy makers have been concerned that a Federal Reserve move could spur foreign investors to withdraw capital by reducing Mexico’s relative attractiveness.

The central bank "remains very dovish in its policy statement, even to the extent of somewhat tapering the synchronization stance they have built over the past months,” Pedro Uriz, a strategist at Banco Bilbao Vizcaya Argentaria SA’s Mexico unit, said in a research note e-mailed to clients. “Banxico is looking for some flexibility to make a more balanced choice between financial stability and economic activity once the Fed decides to lift off.”

The peso plunged 19 percent in the past year, reflecting expectations for higher U.S. rates and the impact of low crude prices on growth in Mexico. Policy makers in their statement Thursday said they’ll continue to monitor all factors that could affect inflation and its expectations in the medium and long term, and that a further deterioration in international financial markets could spur the peso to resume its drop and impact consumer prices.

The currency, which has rebounded 4.2 percent from a record low on Sept. 24, erased its gain after today’s statement, trading at 16.6438 per dollar at 2:12 p.m. local time.

Fed officials Wednesday signaled they may still raise rates in December, betting that further job gains will lead to higher inflation over time and allow them to close an unprecedented era of near-zero borrowing costs. The Federal Open Market Committee dropped a reference to global risks and referred to its “next meeting” on Dec. 15-16 as it discussed liftoff timing in a statement released Wednesday, preparing investors for the first rate rise since 2006.

Banco de Mexico has cut its 2015 growth forecast for Latin America’s second-biggest economy four times. In its most recent quarterly inflation report in August, the central bank projected gross domestic product will climb as little as 1.7 percent this year. Policy makers are scheduled to present their next report on Wednesday.

Mexico’s annual inflation rate has fallen to the lowest in almost half a century, dropping to 2.52 percent in September, amid weak growth, falling costs for phone services and lower gasoline-price increases. Inflation has been below the central bank’s 3 percent goal for the past five months.

“The statement is slightly dovish when they acknowledge that the outlook for global activity and activity in Mexico has deteriorated while the inflation outlook remains relatively benign,” Alberto Ramos, chief Latin America economist at Goldman Sachs Group Inc., said by telephone from New York. “But they want to be consistent with the message they send and move when the Fed moves.”

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