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Banxico Subdued By Weaker Inflation, Global Growth Concerns

Matt Eidinger February 7, 2019

Striking a more dovish tone, Mexico’s central bank, the Banco de México, voted unanimously to leave interest rates unchanged at 8.25 percent. In its policy statement, the central bank downgraded its economic growth projections for 2019, citing, “…the effects of trade disputes, declining business confidence, and transitory shocks” as concerns that could lead “…to downward revisions in the outlook for world growth for 2019”. The central bank went on to suggest that these developments could pose medium- and long-term risks to consumer confidence, economic growth and price stability in the Mexican economy.

The decision to hold interest rates at their current levels was in line with market consensus and recent economic data.

This morning, the Mexican National Bureau of Statistics indicated that headline inflation declined more than expected, falling to an annualized 4.37 percent last month. Similarly, core inflation fell to 3.6 percent – well below market expectations. The gap between headline and core inflation was largely attributable to higher fruit and vegetable prices, which were only partly offset by declining energy costs.

Inflation has fallen by more than a full percentage point over the course of the past two years as central bankers have tightened monetary policy – and remains slightly above the Banxico’s official 3-percent target.

The central bank also noted that it would maintain a flexible stance on monetary policy, with economic developments and the actions of the Federal Reserve acting to influence the path ahead. Economic growth in Mexico slowed down throughout 2018, with the downturn accelerating during the fourth quarter as fears of a slowdown spread through global financial markets.

The peso shrugged the decision off in subdued trading Thursday afternoon, losing less than 0.2 percent against the dollar – effectively rebounding from this morning’s selloff. The currency has gained approximately 7 percent against the greenback since early December – rising in sync with the beginning of Andrés Manuel López Obrador’s presidency.

Bottom Line: Following other major central banks, the Mexican central bank kept its tightening cycle on hold today, adopting a more cautious tone in response to a recent slump in economic data.

Matthew Eidinger
Fintech Specialist, Dealing Operations

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