Mexican central bankers are playing down a temporary spike in inflation but will act if they think raising credit costs can help contain prices, minutes of their July rate meeting showed on Friday. Banco de Mexico policymakers were unanimous in their decision to keep interest rates on hold at 4.5 percent, where they have been for three years.
Despite a recent rise in inflation to 1/1-2-year highs, most central bankers thought the balance of risks to prices in the medium term had improved and the spike, which has been driven by higher fresh produce prices, would prove temporary. But they also said that if inflation pressures became more widespread, they would not hesitate to raise rates for the first time since before the global financial crisis struck in 2008.
"All members agreed that if they observed inflation pressures that could be contained by monetary policy, the board would not hesitate to act," the minutes said. The yield on Mexico's two-year interest rate swap ticked up after the minutes as investors saw less chance of a cut in the coming years. Investors are largely betting on steady rates ahead, with a slight chance of a cut over the next two years priced in.
Mexico's steady stance contrasts with Brazil, where rates have been cut to record lows, and Colombia, which lowered rates unexpectedly on July 27 for the first time in more than two years in the face of a worsening global environment. Pedro Tuesta, an analyst at 4Cast in Washington, said the majority of board members seemed to believe a coming slowdown in Latin America's second-biggest economy would be enough to contain inflation pressures. "But I do not see any indication that they are thinking about cutting in the rest of the year," Tuesta said.
The peso has also recovered more than 10 percent from a three-year low hit earlier in the year, which should help trim inflation in the future by capping the cost of imported goods. Central bank Governor Agustin Carstens said on July 26 that the spike in inflation was due to temporary rises in agricultural prices and inflation should ease by year-end.
Defying a recent weak run of economic data, separate figures showed consumer confidence jumped to its highest in four years last month after voters elected a new government that has promised to boost economic growth. Consumer confidence rose to 96.9 in July when adjusted for seasonal factors, the national statistics agency said, the highest since April 2008. This compared with a reading of 95.7 in June, which was adjusted slightly upward from the original.
The boost followed presidential elections on July 1 when the party that ruled Mexico for much of last century, the Institutional Revolutionary Party or PRI, ousted the incumbent National Action Party (PAN). Incoming President Enrique Pena Nieto, who takes office in December, has promised labour, fiscal and energy reforms in a bid to lift annual growth to 6 percent, well above the average 2.6 percent annual rate of the last two decades.