Mexico keeps rate steady as peso strengthens and Fed holds

The Governor of the Bank of Mexico Agustin Carstens attends the second day of the 79th Annual Convention of Bankers in Acapulco, Mexico, on March 11, 2016. AFP PHOTO/Pedro Pardo / AFP / Pedro PARDO


Mexico kept its overnight interest rate unchanged after the peso’s rebound from a record low eased inflation pressures and the Federal Reserve left borrowing costs on hold.
Banco de Mexico’s Governor Agustin Carstens, held the overnight rate at 3.75 percent.
The central bank said it will pay special attention to the exchange rate and its possible pass-through to consumer prices, while a faster peso appreciation could lower inflation, according to the statement accompanying the board’s decision.
The board lifted borrowing costs half a point in an unscheduled meeting as part of coordinated actions with the government announced Feb. 17 to bolster the currency and head off an increase in inflation
The peso has responded well,strengthening the most among major currencies after Brazil’s real since then. That appreciation opens the door for the central bank to return to its previous strategy of pairing rate increases with the Fed, according to Goldman Sachs Group Inc.
“It’s a bit of a victory lap, that the measures announced Feb. 17 were very effective in anchoring the currency,” said Alberto Ramos, chief Latin America economist at Goldman Sachs in New York.
“If the currency remains well anchored, if there is no evidence of significant pass-through to domestic prices, they will match whatever the Fed does over the next meetings.”

Risk Assessments
The Fed kept rates steady on Wednesday and scaled back forecasts for interest-rate increases this year due to weaker global growth. Mexico’s central bank cut its own forecast for the nation’s growth this year to 2 percent to 3 percent from 2.5 percent to 3.5 percent on March 3, saying that slower U.S. industrial activity will hurt demand for the nation’s goods. The U.S. is the destination for 80 percent of Mexico’s exports.
Banxico said in its statement that the nation’s economic expansion has decelerated with respect to the third quarter of last year, with some signs of private consumption slowing. “The board will follow very closely the evolution of all inflation determinants and expectations for the medium and long term, especially the exchange rate,” according to the statement.

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