Mexico Keeps Rate Unchanged at 3.25%, Highlights Peso Focus

  • Policy makers to pay special attention to nation's currency
  • Peso is worst performing major currency in 2016 on oil tumble

Mexico kept its key interest rate unchanged, matching last week’s decision by the Federal Reserve, and highlighted concern about the implications of the peso’s slump to a record low.

Banco de Mexico, led by Governor Agustin Carstens, held the overnight rate at 3.25 percent Thursday as forecast by all 23 economists surveyed by Bloomberg. The board in December lifted borrowing costs for the first time since 2008 to preserve Mexico’s yield advantage over the U.S.

The central bank moved the peso and the potential for an impact on consumer prices to the forefront of its inflation concerns, saying it will pay special attention to the currency and placing it ahead of monetary posture relative to the U.S. and the outlook for growth. The board had previously signaled the importance of continuing to match future moves by the Fed to prevent capital outflows and financial instability in Latin America’s second-largest economy.

The central bank statement "has a hawkish feel as the bank noted the significant additional depreciation of the peso," Alonso Cervera, chief Latin America economist at Credit Suisse Group AG, said in an e-mailed response to questions. "If the peso were to continue to weaken, no one should be surprised if the central bank were to increase the overnight rate eventually, even if the Fed is on hold."

Focus Points

Mexico’s inflation rate fell to the lowest level in more than four decades in 2015, allowing policy makers to keep borrowing costs at a record low to boost the economy amid declining oil output and a slower-than-anticipated U.S. recovery. The quarter-point rate increase in December ended what amounts to a seven-year easing cycle that included 11 rate cuts as Mexico struggled with the global financial crisis and its aftermath.

The peso lost 0.7 percent to 18.2923 per dollar at 1:59 p.m. in Mexico City. The currency has tumbled 5.9 percent this year, the worst performance among 16 major currencies, amid falling oil prices and concern about China’s growth. The currency touched a record low 18.8024 per dollar on Jan. 21. Mexico last week extended its program of dollar auctions designed to bolster the peso.

"The board will follow very closely the evolution of all determinants of inflation and its mid and long-term expectations, especially the exchange rate and its possible pass-through to consumer prices," the board said in the statement accompanying Thursday’s decision.

Near-Term Risks

While core inflation has reflected some price changes due to the peso’s slump, the exchange rate weakness hasn’t had second-order effects on non-tradable goods and services, the central bank said. While the board forecast inflation to end 2016 near its 3 percent goal, it said the near-term risks to inflation have deteriorated.

Annual inflation slowed to 2.13 percent in December and has been below the central bank’s target for eight months on falling phone service costs, muted gasoline price increases and weak economic growth.

Mexico’s economy last year repeatedly fell short of the central bank’s expectations, with policy makers cutting their growth forecast four times.

In a wider context, the nation has been a bright spot relative to much of Latin America.  Mexico’s gross domestic product is forecast to expand 2.8 percent this year, according to analysts polled by Bloomberg, compared to the regional estimate for a 0.5 percent contraction.

Mexico’s economy has been buoyed by a rebound in domestic demand amid low inflation. Fourth-quarter growth beat economists’ lowered expectations, led by the services sector, according to preliminary figures released by the national statistics institute last week.

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