Mexico holds rate, eye on peso's impact on inflation

    Mexico's central bank left its benchmark overnight rate steady at 3.0 percent, as expected, underscoring that it "will remain attentive" to all factors that determine inflation, in particular the difference between U.S. and Mexican monetary policy, the exchange rate of the peso and its impact on inflation and the degree of slack in the country's economy.
    The Bank of Mexico, which cut its rate by cut by 50 basis points in June 2014, said inflation expectations have continued to decline, reflecting lower oil prices, a widespread appreciation of the U.S. dollar and a lack of pressure from labor costs.
    Mexico's consumer price inflation eased to 4.08 percent in December and the central bank confirmed its forecast for inflation to reach its 3.0 percent target by mid-2015 and end the year slightly below that level. Core inflation is expected to be below 3 percent most of the year.
    International financial markets has recently become more volatile, with many emerging market currencies depreciating. This includes the peso, which has been particularly sensitive to lower oil prices due to investors' concern over the impact on tax revenue and the current account.
    So far, however, the central bank said movements in the peso's exchange rate have been relatively orderly although volatility may rise at the prospect of a U.S. rate increase in 2015, underscoring the importance of a strengthened macroeconomic framework.
    The peso started falling sharply in November last year but bounced back slightly in January. The peso was quoted at 14.79 to the U.S. dollar today, slightly up from the start of the year.

    Despite continued moderate economic recovery with exports performing well, the central bank said there was still significant downside risks to economic activity as private consumption is not showing clear signs of recovery and increased government spending has had limited impact on growth.
    Mexico's Gross Domestic Product expanded by 0.5 percent in the third quarter from the second for annual growth of 2.2 percent, up from 1.6 percent in the second quarter.
 
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