beyondbrics

There were no surprises when Mexico’s central bank on Friday kept the benchmark interest rate at 4.5 per cent. The decision was the 16^th consecutive time that the five-member board has opted to keep rates on hold, heralding the longest period on record without a change.

And it is almost certain that the bank will maintain the 4.5 per cent rate for the rest of this year – in stark contrast to other economies in the region such as Brazil and Chile, which have already increased rates.

In the run-up to Friday’s meeting, some economists thought that the bank’s accompanying statement would convey an increasingly cautious tone with regard to inflation. The main thinking was that Mexico’s economic recovery, which so far has been driven by a huge growth in the export sector, was finally feeding through to the domestic economy, increasing demand and reducing the output gap – the difference between a country’s actual growth rate and its potential growth rate.

A second factor was the recent and dramatic increase in international commodity prices, particularly grains. According to the United Nations, global food prices rose to a record high in December.

Yet while the bank on Friday said that Mexico’s economy was indeed showing more vigor, following a 4 per cent GDP increase in 2010. “The output gap has been closing at a quicker pace, so it is estimated that it could turn positive during the second half of 2011,” the bank said in a statement – it also noted that investment levels represented a drag on higher economic growth.

Separately, recent figures in the jobless rate suggested that there was still significant margin for a pick-up in employment.

Perhaps most interestingly, the bank played down potential concerns that the rising price of food could boost inflation, citing the recent strengthening of the local currency as a benevolent factor in offsetting the increases. This month, the peso strengthened to less than 12 pesos to the US dollar, the strongest since October 2008.

“The appreciation in the exchange rate has partly compensated for the effects of the increases in international prices for raw materials,” the statement said. “It’s still expected that annual inflation will again show a clear falling trend in 2011.”

For the bank, that means that annual inflation will be between 3.75 per cent and 4.25 per cent during the first three months of this year, falling to between 2 per cent and 4 per cent in the second half of the year – within the official 3 per cent target with a one-percentage-point margin either side.

RBS said in a note:

Our take is that there is not yet enough evidence to revise our view that the central bank will start reducing monetary stimulus early in 2012 to an earlier start of the interest rate hiking process, although we do recognize the risks of that occurring are rising.

We believe that Banxico remains very much concerned about the still high global uncertainty and will thus maintain a flexible approach towards its monetary policy.

In other words, don’t expect any change in interest rates until 2012.