Mexico maintains rate, inflation seen moving to target

    Mexico's central bank held its benchmark target for the overnight interbank rate steady at 3.0 percent, as widely expected, saying this stance was consistent with inflation converging to the bank's midpoint target of 3.0 percent.
    The Bank of Mexico, which surprised markets by cutting its rate by 50 basis points in June, said economic growth in the second quarter looks to improve from the previous two quarters due to better exports while domestic spending still doesn't show any clear signs of a recovery.
   The degree of slack in the economy is still higher than the bank anticipated a few months ago and the output gap is likely to remain negative until the end of 2015, the central bank said, adding there are no inflationary pressures expected in the period ahead.
    In May the bank, known as Banxico, cut its 2014 growth forecast to between 2.3 and 3.3 percent from a previous range of 3 to 4 percent. In 2013 Mexico's economy expanded by 1.1 percent.
    In the first quarter of this year Mexico's Gross Domestic Product expanded by 0.28 percent from the previous quarter for annual growth of 1.8 percent, up from 0.7 percent in the fourth quarter.
    Mexico's inflation is largely as expected by the central bank, with headline inflation below 4.0 percent and core inflation around 3 percent, the bank said, adding inflation should ease to around 3 percent in the first months of 2015, helped by the absence of second-order effects from the rise in taxes in late 2013 and early 2014, along with lower gasoline prices in January.
    In June Mexico's headline inflation rate rose to 3.75 percent from 3.51 percent in May. In its quarterly inflation report from May, the central bank also said it expected inflation to near 3 percent in early 2015.
   The central bank targets inflation of 3.0 percent, plus or minus one percentage point.
    Turning to the global economy, the central bank said on balance there are still downside risks while volatility in international financial markets has been low with large flows of capital to emerging markets, reflecting the search for yield by investors.
     And while there is a risk of a resurgence of high volatility, the bank said this risk was partly  mitigated by the intention of central banks in advanced economy to maintain loose monetary policy for an extended period.
 
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