Mexico holds rate, but signals rate cuts may be coming

    Mexico's central bank left its benchmark interest rate unchanged at 4.50 percent, as expected, but switched course and said it may now have to cut interest rates in light of lower growth and inflation.
    Banco de Mexico, which in recent months has warned that it may have to raise rates if inflation picks up speed, said the balance of risks to inflation had improved, especially in light of the government's commitment to sound public finances, and headline inflation this year is expected to fall below last year's level to around the central bank's target of 3.0 percent, plus/minus one percentage point.
    Core inflation is expected to fall below the 3.0 percent level, the bank said.
    "To consolidate the described environment, it may be advisable to reduce the interbank interest rate to facilitate the adjustment of the economy to lower economic growth and lower inflation," the central bank said, adding: "In any event, the Board will monitor the progress of all the factors that could affect inflation in order to be able to reach the 3 percent target."
    Mexico's inflation rate fell for the third month in a row in December to 3.57 percent from November's 4.18 percent, leading to speculation by economists that the bank would turn less hawkish and no longer warn that it may have to raise rates.

    The bank said the drop in inflation, which reverses the increases between May and September, was due to lower contributions from core and non-core components and annual core inflation fell to 2.9 percent in December due to lower growth in the index for goods and lower prices of some services, mainly telecommunications.
    The drop in inflation is taking place in an environment of no pressure from the demand side and inflation expectations have remained stable, helped by the bank's policy stance, it said.
    The central bank also said Mexico's economic growth rate has moderated with exports slowing compared with the first half of 2012 and growth of external demand and some parts of domestic spending have fallen.
    "Downside risks remain for the Mexican economy as a reflection of macroeconomic imbalances in major developed economies," the bank said, adding that there are still important downside risks to global economic growth even if they have improved at the margin.
    Mexico's Gross Domestic Product expanded by a slight 0.45 percent in the third quarter from the second for an annual growth rate of 3.3 percent, down from the second quarter's 4.1 percent and the first quarter's 4.5 percent.
    In a global environment of slower economic growth with prices of raw materials declining and inflation levels that will be lower this year than in 2012, the central bank said it expects monetary policy to remain very accommodative worldwide and in some cases a further relaxation may occur.
    Mexico's central bank has held its interest rate steady since June 2009.

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