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Banco de Mexico Holds Interest Rates at 7%

Inflation in Mexico was 6.4% higher than last year, but that did not prove enough to convince Mexico’s central bank, Banco de Mexico to raise short term interest rates. Instead, the bank heald steady and kept short term rates at 7%. The bank had previously raised those same rates seven different times in less than two years.

It is the first gesture that indicates the gradual normalization of monetary policy: most analysts expect the institution to start raising interest rates by the middle of next year to recover its coordination with the monetary policy of the US Federal Reserve, a country to which the Mexican economy is closely linked.

“Considering that adjustments in monetary policy have a lagging effect on inflation, the monetary policy actions that have been implemented have also begun to be reflected in various indicators and inflation headings that have recently shown a reduction in their growth rate,” the bank, governed by Agustin Carstens said in a statement.

Mexico is living in a sort of inflationary island: while prices continue to rise in the developed economies, with the United States and the European Union leading the way, rising fuel prices and rising prices of several key agricultural products popular in Mexico, like tomato, have hindered efforts to rein in inflation in Mexico.

The Bank of Mexico, however, has downplayed this increase – which it considers to be “transitory” – and is still confident that the inflation rate will settle in 2018 close to the 3% target set by the central bank. “Even though it is expected that in the next few months that inflation will continue to be above 6%, it seems to be approaching its ceiling,” the agency said. “In fact, it is expected that in the last months of this year inflation will resume a downward trend and that it will become more pronounced next year.”

 

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