The Bank of Mexico kept the interest rate unchanged at 3.25%, on par with expectations. The central bank, in its statement, acknowledges a decline in growth outlook, both domestically and globally, and looks at the recent decline in peso as the most critical threat to inflation. The Mexican peso depreciated considerably due to the recent instability in financial markets. Hence, it is important to carry on bolstering Mexico's macroeconomic fundamentals.
The central bank's board does not exclude the rise in market volatility, while the Chinese economy might continue to slowdown and oil prices might remain lower for a longer period of time. The board, in this context feels it is important to make more adjustments in public finance to absorb the negative shock to public revenues from cheaper oil prices, execute energy reform in a proper manner and adjust monetary policy at a significant pace.
Inflation risks have risen in the short term, while the growth prospect has declined. Recently, investment dynamism has dropped, manufacturing exports stagnated. Meanwhile private consumption has helped growth. Inflation projections continue to fall, mainly for 2016 and 2017. The performance of the exchange rate is the most significant risk to inflation. If peso's depreciation continues or worsens, inflation expectations might deteriorate along with non-tradable goods prices.
"We believe that Banxico will stay linked to the Fed, at least in the short term. We expect inflation to remain well behaved, as the labor market is far from being overheated, so we rule out a reaction derived from negative inflation dynamics", says Barclays.
