MEXICO CITY—The Bank of Mexico on Friday left its overnight interest rate target unchanged at 4.5%, highlighting a slowdown in economic activity and a lack of overall inflation pressures in the economy.
The decision to leave the policy rate at the level it has been at since July 2009 came as no surprise, with the central bank widely expected to keep rates unchanged until the second quarter of 2012.
Some economists predicted earlier this year that rate hikes would start by the summer.
However, Nomura Securities' Benito Berber said Friday, "The weakness in the U.S. economic recovery, as evidenced by this morning's dismal nonfarm payroll number, and the anemic recovery of Mexican domestic demand literally forced the market to open their eyes and postpone hiking expectations."
The U.S. jobs data took down stocks Friday, and the Mexican peso, which closed Thursday at a two-month high of 11.5490 pesos to the dollar, retreated to 11.6300.
The Bank of Mexico said the pace of Mexico's economic activity appears to have decelerated, although the impact of the recent natural disasters in Japan seems to have already abated.
Even so, domestic spending has lost some energy, suggesting that the output gap—the difference between actual and potential output—will close later than the bank had previously envisioned.
In a prior statement, the central bank estimated that the output gap would close and turn positive by midyear.
Labor and credit markets, though, have room to grow, the bank said, alleviating concerns about generalized price pressures in the economy.
Credit Suisse economist Alonso Cervera noted that the bank said no generalized pressures on prices are "expected" whereas in May the bank had said "observed." The bank also characterized the evolution of inflation as "favorable," rather than merely in line with projections.
The central bank said inflation is within its forecast range of 3% to 4%, although the risk remains that turbulence will return to international financial markets and that prices for some agricultural goods will surge.
Consumer prices in Mexico were unchanged in June as lower prices for fresh produce, including tomatoes, and services, such as education, offset rising costs for non-food expenses like energy. Annual inflation stood at 3.28% as of the end of June while core inflation was at 3.18%.
A favorable exchange rate, with the peso trading near 2½-year highs against the U.S. dollar, has contributed to lower inflation, as has the downward trend in unit labor costs and diminishing impact of tax changes implemented in 2010, the bank said.
Unlike a number of its peers in Latin America, where central banks have been raising the rates that were lowered to confront the 2008-2009 crisis, Mexico has experienced economic expansion without signs of overheating or significant inflation pressures.
The central bank noted that some emerging market economies have begun to present moderations in their "very vigorous" growth rates, while the outlook for global economic growth has deteriorated.
Gross domestic product in Mexico registered in the first quarter its seventh consecutive quarter of growth but at a slower pace than in 2010, when the economy grew 5.4%. GDP in the January-to-March period was up 4.6% from a year earlier and expanded 0.5% seasonally adjusted from the previous quarter.
Source: http://online.wsj.com
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