Commentary: Can No News Be Good News?

As widely expected, Banco de México held its target rate for overnight interbank loans at 4 percent.  The real news toady was the shift in bias from the governing board from slightly dovish to a markedly neutral tone.  The bank signalled no further rate cuts, or rate increases.  It it reaffirmed its view that transitory supply shocks were driving the above target inflation of recent months.  Specifically, high agricultural prices were passing through in the form of increased food costs for the consumer.  The bank noted that core inflation was coming in on target at 3.02 percent, and predicted a drop in the general inflation index by August.  

On the FX front, the bank discussed substantial capital flows into Mexico, which has both reduced borrowing costs for firms but also resulted in a marked appreciation of the peso.  At the same time, the bank opposes capital controls, and called the peso's appreciation from last year's record lows as "important" for helping to keep inflation in check. Other recent publications of the bank have warned of downside risks of sudden stops or reversals of capital flows which time after time have devastated emerging market economies.

Today's statement was generally somber, stressing slow growth observed in advanced economies and the threat this poses to growth in emerging markets.  The bank seems to recognize that the performance of the Mexican economy has been generally good.  The bank did not stoke market euphoria nor discourage further foreign investment.  The bank's seems to have gotten its message across.  The peso was little changed this morning, trading around 12.14 per dollar as of 8:04 PM GMT.