Mexican Central Bank Stays On Hold

Mexico’s Monetary Policy Inflation Dynamics (% y/y)


Source: Banxico and RGE

The cental bank of Mexico (Banxico) stayed on hold at its April meeting—leaving the monetary policy rate at 4.5%, as expected. Banxico’s communiqué highlights the multispeed recovery throughout the globe (with emerging markets growing stronger than developed markets).

It also mentions uncertainty regarding the sustainability of the US recovery once economic stimulus is withdrawn; fiscal problems in Europe; and the impact of Japan’s earthquake. Domestically, Mexico’s economy has continued to accelerate, as suggested by various activity indicators, and the output gap is expected to close by mid-year. Still, labor markets, credit markets and installed capacity continue to show economic slack, as does the reduction of the current account deficit. Inflation dynamics have been positive in Q1 2011, aided by a strong currency, limited wage pressures and base effects. However, Banxico expects inflation to reverse in the following months, affected by upward risks to commodity prices. The communiqué states that Banxico will watch the behavior of inflation expectations, output gap, commodity prices and other inflation determinants, and will adjust its monetary policy stance if unexpected pressures on prices rise, in order to meet its 3% inflation target.

Editor’s Note: This post is excerpted from a longer analysis available exclusively to RGE Clients, “Brazil Likely to Hike Rates in April; Mexico Stays On Hold.”

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