Mexico Keeps Key Rate at Record Low 3% as Economy Still Weak

Mexico’s central bank kept borrowing costs unchanged at a record low for a seventh straight meeting, saying Latin America’s second-biggest economy continues to show weakness and no demand-side inflation pressures.

Banco de Mexico’s board, led by Governor Agustin Carstens, kept the overnight rate at 3 percent on Thursday, as forecast by all 26 economists surveyed by Bloomberg. After a surprise half-point reduction in June, policy makers have kept rates unchanged to boost a $1.26 trillion economy that has missed growth forecasts in eight of the past 11 quarters.

Manufacturing exports have shown some signs of weakness and a drop in oil output has hurt industrial production, the central bank said in the statement accompanying its decision. While the peso’s plunge to a record low hasn’t had second-order effects on consumer prices, policy makers emphasized Mexico’s links with the U.S. economy and the impact of Federal Reserve decisions.

“A lot depends on how the exchange rate reacts to the Fed,” Alonso Cervera, chief Latin America economist at Credit Suisse Group AG, said in a telephone interview. “Local variables will carry more weight in 2016, but for now the focus is 100 percent on the exchange rate.”

Fed Expectations

Policy makers probably will keep borrowing costs unchanged until at least the third quarter, when they’ll raise them for the first time since 2008 as the Fed lifts rates, according to the median forecast of economists surveyed by Bloomberg. The U.S. is preparing to tighten monetary policy even as weaker growth elsewhere prompts central banks in Europe, China and Japan to ease policy.

Mexico’s central bank is concerned a smaller rate advantage versus the U.S. could prompt investors to pull money out of Mexico. The difference between their target rates is 2.75 percentage points, the least since Mexico adopted a new benchmark in 2008.

The peso maintained its loss after the decision, weakening 0.9 percent to 15.3597 per dollar at 2:03 p.m. in Mexico City.

The currency in March tumbled to the weakest level since its redenomination in 1993, reflecting speculation the Fed will raise rates and the impact of low crude prices on growth in a country that depends on oil for a third of public revenue. The peso plunge prompted the central bank to announce $52 million in daily dollar sales to bolster the currency.

FX Focus

Mexico’s growth risks are still tilted to weakness, though unchanged since the central bank’s last decision in March, policy makers said today. The central bank reiterated its forecast for inflation to remain near its 3 percent goal for the rest of this year and continue near that level in 2016.

“Slack conditions remain in the labor market and in the economy as a whole, so generalized price pressures from aggregate demand aren’t anticipated,” policy makers said. The board will pay particular attention to “the relative monetary posture between Mexico and the United States, as well as the development of trends in the exchange rate.”

Mexico’s annual inflation rate in February fell to 3 percent, the lowest since 2006, on weak growth, smaller gasoline price increases and reduced rates for telephone services.

Growth Forecasts

Economists have reduced their forecasts for Mexico’s growth this year and now project a 2.8 percent expansion, down from a 3.4 percent estimate in December, according to surveys by Citigroup Inc.’s local Banamex unit. Mexico’s economy grew below that pace in January and February, expanding 2 percent and 2.3 percent respectively from a year earlier, according to the national statistics institute.

After cutting spending by 0.7 percent of gross domestic product in 2015, Mexico will reduce outlays by another 0.7 percent of GDP next year on the expectation that oil prices may remain low for years, the Finance Ministry said in March.

Crude prices fell 45 percent from their 2014 high in June through Wednesday. Mexico’s oil output during the first three months of this year fell from a year earlier even before a deadly platform fire caused a further drop in April.

Some indicators show Mexico’s economy improving. The unemployment rate fell in March to 4.2 percent, the lowest since 2008. The nation’s consumer confidence index has also recovered to higher than year-ago levels during the first three months of the year, giving a boost to retailers. Retail sales climbed 5.6 percent in February from a year ago, more than the median forecast of economists surveyed by Bloomberg.

“We’re in an environment in which inflation is under control and growth is recovering little by little,” Delia Paredes, an economist at Grupo Financiero Banorte SAB, said in a telephone interview from Mexico City before the rate decision. “Banco de Mexico is basically waiting for the Fed.”

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