Banco de Mexico board increases overnight interest rate 25 bps to 6¾%

By Caroline Salls

Pittsburgh, May 18 – The board of governors of Banco de Mexico decided to increase the bank’s overnight interbank interest rate by 25 basis points to 6¾%, according to a Thursday news release.

The board said global economic activity continued to recover, reflecting a rebound in investment, industrial production and global trade.

While gross domestic product growth in the United States decelerated during the first quarter of the year, the bank said it is estimated that this performance was mainly driven by temporary factors, with a rebound expected for the second quarter, and the labor market continued to strengthen.

Despite a temporary interruption in its upward trend, inflation is expected to gradually converge toward the Fed’s medium-term target of 2%.

World economies

In addition, the board said expectations are growing that by the end of the current year or the beginning of next year, the Fed will begin to take actions aimed at reducing the size of its balance sheet, which would accelerate the process of normalization of U.S. monetary policy.

In the euro zone, the United Kingdom and Japan, the bank said economic activity resumed and a moderate rebound in inflation was observed, although this activity is still weak.

With regard to emerging economies, the board said economic activity has also recovered, although at lower levels, while the vulnerabilities of China’s economy appear to have increased.

The bank said global economic activity is expected to continue to strengthen throughout the rest of 2017 and into 2018, although this growth scenario faces downside risks, including high uncertainty about the direction of U.S economic policy and growing geopolitical tensions in various regions.

Financial markets improve

Since the last monetary policy decision, the board said conditions in Mexican financial markets have continued to improve, in line with that observed in global markets.

The exchange rate maintained a significant appreciation compared to the levels reached at the beginning of the year and, although volatility remained high, was lower than the first quarter of the year, according to the release.

Meanwhile, the board said interest rates for all periods showed moderate increases, in line with a more restrictive monetary stance, but the yield curve has continued to flatten.

The governors said the Mexican economy continued to expand in the first three months of the year at a pace similar to that observed in the last quarter of 2016. In particular, the board said external demand continued to improve, while private consumption continued to perform well.

In contrast, the bank said weakness in investment, both public and private, was accentuated, mainly as a result of the uncertainty about the future of the bilateral relationship between Mexico and the United States.

Inflation update

According to the release, general inflation continues to show an upward trend, reaching a level of 5.82% in April, as a result of increases in both underlying and non-core inflation.

The board said underlying inflation, which stood at 4.72% in April, continued to show an upward trend reflecting the accumulated depreciation of the national currency and the indirect effects of energy price adjustments from the beginning of year.

Annual non-core inflation continued to grow, standing at 9.25% in April, reflecting both increases in energy prices and increases in the last month in the prices of some agricultural products and in the rates authorized by the government, the release said.

Over the next few months, the bank said general annual inflation is expected to continue to be affected by the increase in the rates of motor transport and some agricultural products, as well as the transitory impact of rising energy prices.

As a result, inflation is expected to be considerably higher during 2017 than the upper limit of the bank’s range. However, inflation is expected to resume a path toward the 3% target in the last months of 2017 and during 2018.

© 2015 Prospect News.
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