Central Bank Keeps Rate At 4.5%

At its monthly monetary policy meeting Friday, the five-member Bank of Mexico board voted to maintain the benchmark overnight interbank interest rate at 4.5%, a move (or lack thereof) widely expected in the market.

The vote and minutes are secret in Mexico, and the public must rely on reading between the lines of the monthly bulletin.

The press release stated:

"In Mexico the economy continues recovering at a quicker rhythm than expected. In fact, the majority of the analysts have been raising their GDP growth prognostics. Nevertheless, diverse indicators of utilized capacity, private investment, and some consumer signs suggest that activity levels will continue below potential this year, even if it is at higher levels than previously thought."

READ: The economic surge in the fourth quarter of last year has not been sustained in the first quarter of this, likely due to pent-up demand and statistical effects of comparison. Mexico is still way below recovery levels and is not rushing to return.

"In line with the aforementioned, employment levels have been rising, even though they have not reached the levels seen in 2008. This situation has contributed to the moderation of salary increases."

READ: Companies are hiring again, but the ranks of the under- and unemployed are so swollen that hiring pressures have muted effect on salaries."

"The evolution of inflation is expected to continue in line with the prevision that the central bank outlined in the Q309 Addendum. This expectation is sustained by the facts that salary increases have been moderated, the exchange rate has been appreciating, and the medium- and long-term inflation expectations remain anchored, though above the goal of 3%. In the same sense, despite the improved economic performance, there do not appear to exist aggregate demand pressures. However, with the reduced slack in economic growth, the buffer against higher consumer prices feeding through from the new taxes and public-sector prices is thinning."

READ: Retailers have been forced to eat the cost of new taxes and higher gasoline prices in a relatively weak consumer environment, but economic growth could lead to pricing adjustments real quick.

"In light of the aforementioned, the board will closely watch the trajectory of inflation expectations in the medium- and long-term, as well as other indicators that could signal unexpected and generalized upward pressure on prices. This is for the purpose of being able to make adjustments to monetary policy in order to reach the 3% inflation goal toward the end of next year."

READ: As soon as we can raise rates without choking of incipient growth, we will.