Mexico Leaves Key Rate Unchanged as January Inflation Slows

(Bloomberg) -- Mexico’s central bank left its key interest rate unchanged at a decade high Thursday, saying that while the inflation outlook has remained steady since its last decision, it faces risks from renewed exchange-rate weakness.

Policy makers led by Governor Alejandro Diaz de Leon unanimously voted to keep borrowing costs at 8.25 percent, as forecast by all 25 analysts in a Bloomberg survey. The board has more than doubled the rate over the past three years, one of the most aggressive tightening actions in the world.

Policymakers highlighted inflation risks including the peso’s slump, pressure on energy or farm prices, global trade tensions and deterioration in domestic public finances. They also noted risks to growth remain biased to the downside, and that the economy’s slowdown may continue into early 2019 based on the global environment, weakness in domestic demand and disruption to fuel distribution amid the government’s fight with thieves.

This is a "fairly balanced statement, with no groundbreaking changes," said XP Investments economist Alvaro Mollica, the top overnight rate forecaster according to Bloomberg’s ranking. "To us, it reads as neutral. It’s interesting that they chose not to overemphasize the deterioration of economic activity, or, on the opposite side, the improvement in inflation. They played it cool."

Mexico Leaves Key Rate Unchanged as January Inflation Slows

The peso rallied in recent weeks, relieving some inflation pressures, after the government reached a deal with bondholders of a canceled $13 billion airport project and Congress passed a well-received budget plan. The Fed also opted to take a pause last week and implied that its next move was just as likely be down as up, a shift noted by Mexico’s central bank on Thursday. The peso weakened as much as 0.3 percent after the decision.

A report earlier Thursday showed inflation slowed more than expected in January, with the annual rate falling to the lowest level in more than two years, as gasoline and tomato prices fell.

Mexico’s economy weakened in the fourth quarter amid a contraction in industrial activity, prompting some economists to warn it may further lose steam. The central bank board has consistently highlighted the peso’s impact on inflation, Mexico’s monetary posture relative to the U.S. and the degree of slack in the economy as the top factors that it’s monitoring.

Read more: How Tight Labor Markets May Yet Trigger Central Bank Surprise

Mexican growth is expected to be 1.9 percent this year, compared with a 2 percent preliminary reading for 2018, according to a Bloomberg survey of economists.

Bank of America is less optimistic and cut its forecast to 1 percent from 2 percent last month, citing risks including U.S. Congress rejecting the new North American free trade deal, a possible drop in confidence in President Andres Manuel Lopez Obrador and a bigger drop in oil output. Fitch Ratings spurred concern last week when it downgraded state-owned Petroleos Mexicanos two levels to BBB-, just a notch above junk.

Thursday’s rate decision is the first since Lopez Obrador’s central bank selections Jonathan Heath and Gerardo Esquivel, who were confirmed by Congress in January, joined the five-member board, replacing Manuel Ramos Francia, whose term expired, and Roberto del Cueto, who unexpectedly resigned.

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