News: Banco de México Stands Pat, for Now.

Mexico's central bank held its key interest steady at 4.5 percent today in an announcement released at 10:30 AM central time in Mexico City.  The five member board headed by Austín Carstens has kept its target rate, the rate at which banks lend to each other overnight on an unsecured basis, at a record low since May of 2009, though has maintained a "neutral monetary policy," in the words or Mr. Carstens since then.  Mexico's relatively strong economic performance during the global recovery has caused the nation's central bank to refrain from further asset purchases or rate reductions for three years, even as its counterparts in both advanced and emerging markets have stepped up efforts to speed growth through monetary stimulus.  Both the Federal Reserve and the Bank of England have recently expanded their respective QE programs, while this quarter has also seen surprise rate cuts from emerging market economies like South Africa and Thailand.

Mexico's decision to hold its rate at 4.5 percent was widely expected by most analysts, however, the statement of monetary policy provides new insight into the overall stance of the Banco de México's board of governors.  While the growth outlook was somber, and warned global macro risks such as the so-called fiscal cliff in the US and the ongoing trials and tribulations of the Euro-zone, the bank appears to be losing its patience with inflation.  Inflation in Mexico hit 4.77 percent last month, outside of the central bank's target of two to four percent.  While the bank in its statement attributed the rise in general inflation to supply shocks in both food and energy, noting that core inflation has stayed steady, it expressed the will to act even if it judges risks of higher inflation are only due to short term spikes in the price of oil and/or agricultural commodities.  Of particular concern to the bank is the possibility that above target general inflation may skew inflation expectations in the real economy upward, even if the rise in CPI is mainly due to price increase in items excluded from core inflation, rather than a general rise in prices across all sectors.  The bank therefore strongly hinted at possible rate hikes in the near future to "consolidate currently low inflation expectations, prevent 'contamination' of the process of price formation in the rest of the economy, and not compromise the bank's commitment to achieving a longterm inflation target of 3 perent."

Furthermore, Carstens has stated publicly on several occasions that volatility in global financial markets has resulted in overselling of emerging market currencies, particularly the Mexican Peso.  He has continually characterized the peso as "clearly undervalued" and has stated that further appreciation back towards 11 MXN per USD would be a welcome relief to both Mexican consumers and businesses which have been squeezed by higher import costs.  That said, Mr. Carstens has also insisted that any kind of peso appreciation must come from strong fundamentals and economic performance rather than any specific or set of central bank policies.

This morning's announcement failed to move the peso which bounced around in a range today and closed in New York at 13.02 per USD.