Mexico’s central bank remained on hold Friday despite the recent currency turmoil in emerging markets and higher local inflation, but warned that it will remain watchful to keep the recent depreciation of the peso from affecting prices.
In its first policy decision of the year, the Bank of Mexico met expectations and left the overnight interest rate unchanged at 3.5%.
Most analysts were expecting the bank to remain true to its reputation for predictability and do nothing for the moment amid the recent depreciation of the peso and other emerging market currencies.
The Mexican currency gained ground after the decision, trading recently at 13.33 to the U.S. dollar. Turmoil in financial markets during recent weeks, generally attributed to the continued stimulus withdrawal in the U.S., concerns about growth in China, and the recent financial turbulence in Turkey and Argentina, have weighed on several emerging market currencies.
The Mexican peso has resisted more than many of its peers, but has depreciated around 2.5% this year. Both the Turkish and South African central banks have raised borrowing costs in an effort to shore up their currencies, making them more attractive to investors.
But Mexico’s central bank decided to adopt a wait-and-see approach. The central bank also hasn’t intervened in the currency market. Some observers pointed out that the Mexican central bank (Banxico) likely wanted to differentiate itself from its peers.
“Banxico is suggesting it won’t follow the strategy of other emerging market central banks of retaining foreign capital flows by raising interest rates,” said Banorte chief economist Gabriel Casillas, who expects the bank to remain on hold in the foreseeable future.
“Even though the currency has depreciated significantly, it has been relatively much less than in other emerging markets,” a high-level Banxico official who asked not to be identified said earlier this week.
“If you look at our record, we have always given the market plenty of room to settle,” added the official, who isn’t on the central bank’s policy-making board.
The Bank of Mexico appeared more worried about inflation, acknowledging that the growing volatility in financial markets could end up affecting prices through the exchange rate in the near term.
Twelve-month inflation in Mexico hit 4.6% as of mid-January, well above the central bank’s 4% target ceiling, narrowing the maneuvering room for the policy makers. The bank said inflation will remain above 4% for several months.
The central bank led by Gov. Agustin Carstens also said it will keep close watch on monetary policy in the U.S., where the Federal Reserve is gradually reducing its bond-buying program as the economic recovery in the world’s largest economy gains pace.
The outlook for growth in Mexico is gradually recovering, the central bank said, as private consumption and government spending are picking up.
wsj.com
In its first policy decision of the year, the Bank of Mexico met expectations and left the overnight interest rate unchanged at 3.5%.
Most analysts were expecting the bank to remain true to its reputation for predictability and do nothing for the moment amid the recent depreciation of the peso and other emerging market currencies.
The Mexican currency gained ground after the decision, trading recently at 13.33 to the U.S. dollar. Turmoil in financial markets during recent weeks, generally attributed to the continued stimulus withdrawal in the U.S., concerns about growth in China, and the recent financial turbulence in Turkey and Argentina, have weighed on several emerging market currencies.
The Mexican peso has resisted more than many of its peers, but has depreciated around 2.5% this year. Both the Turkish and South African central banks have raised borrowing costs in an effort to shore up their currencies, making them more attractive to investors.
But Mexico’s central bank decided to adopt a wait-and-see approach. The central bank also hasn’t intervened in the currency market. Some observers pointed out that the Mexican central bank (Banxico) likely wanted to differentiate itself from its peers.
“Banxico is suggesting it won’t follow the strategy of other emerging market central banks of retaining foreign capital flows by raising interest rates,” said Banorte chief economist Gabriel Casillas, who expects the bank to remain on hold in the foreseeable future.
“Even though the currency has depreciated significantly, it has been relatively much less than in other emerging markets,” a high-level Banxico official who asked not to be identified said earlier this week.
“If you look at our record, we have always given the market plenty of room to settle,” added the official, who isn’t on the central bank’s policy-making board.
The Bank of Mexico appeared more worried about inflation, acknowledging that the growing volatility in financial markets could end up affecting prices through the exchange rate in the near term.
Twelve-month inflation in Mexico hit 4.6% as of mid-January, well above the central bank’s 4% target ceiling, narrowing the maneuvering room for the policy makers. The bank said inflation will remain above 4% for several months.
The central bank led by Gov. Agustin Carstens also said it will keep close watch on monetary policy in the U.S., where the Federal Reserve is gradually reducing its bond-buying program as the economic recovery in the world’s largest economy gains pace.
The outlook for growth in Mexico is gradually recovering, the central bank said, as private consumption and government spending are picking up.
wsj.com
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