Mexico holds rate but risks rising, watching peso

    Mexico's central bank left its benchmark target for the overnight interest rate steady at 3.25 percent as inflation is expected to converge to the bank's target but warned that the economic situation had changed in an unfavorable manner and risks had risen so it was closely monitoring inflationary expectations, especially the exchange rate and how it affects consumer prices.
    The Bank of Mexico, which in December raised its rate by 25 basis points in the wake of the U.S. Federal Reserve's hike, added that it was especially watching the relative position between the U.S. and Mexico in order to take flexible measures when conditions warrant.
    The central bank noted that the the balance of risks to global growth and inflation had worsened since December as the global economy was continuing to weaken and one could not rule out that emerging economies with greater vulnerabilities could "face a messy financial adjustment process."
    This also meant that Mexico's peso had depreciated against the U.S. dollar after the Federal Reserve maintained its rate in January and looking ahead it cannot be "ruled out that international financial volatility will remain high or even increase," the central bank said.
    The peso was trading at 18.28 to the U.S. dollar today, down from 17.2 at the start of this year with the central bank on Tuesday saying that it had twice sold $200 million at two auctions after the peso fell more than 1 percent from its fix in the previous session and then fell another 1.5 percent.
    Mexico's economy was still showing sustained growth in the fourth quarter of last year, helped by higher wages, but the bank said manufacturing exports were stagnant and it growth in output in the fourth quarter was moderately lower than in the third quarter.
    Mexico's Gross Domestic Product expanded by an annual 2.5 percent in the fourth quarter, slightly below 2.6 percent in the third quarter.
    Mexico's inflation rate eased in December to a 2015-low of 2.13 percent, down from November's 2.21 percent but data for the first half of January show a rise to 2.48 percent due to the comparison of the cut in the cost of telephone services in January 2015.
    The central bank expects that both headline and core inflation will end this year close to 3.0 percent and then stabilize around that level in 2017.
    The central bank targets 3.0 percent inflation, plus/minus 1 percentage point.

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