Bank of Mexico Ready to Adjust Policy Depending on Inflation MNI
go to original June 23, 2012

MEXICO CITY - The Bank of Mexico said Friday the board members agreed they would have to stand ready to adjust policy in either direction depending on how the inflation picture evolves, and stressed the importance of signaling that to the markets.

In the minutes of the June 8 policy meeting, the central bank elaborated on the reversal of language in the prior four statements which had made clear an ease was likely to be the next move -- a position signaled strongly at the April 27 meeting when there was some expectation a rate cut would be announced.

"All the board members agreed the Bank of Mexico must watch the determinants of inflation to make it possible to adjust the monetary policy posture opportunely to make it more or less restrictive, depending on the scenario that presents itself," the minutes said.

In addition, "all the members of the board reiterated the importance of the Bank of Mexico sending a balanced and symmetrical message that reflects the determination of the board to act in either direction, in accordance with the circumstances."

This was a significant change from the statements Dec. 2, Jan. 20 and March 16 policy meetings which indicated an ease might be the next move, and the April 27 policy statement strengthened that language further, highlighting the importance of global financial markets:

"Going forward, the Board will remain alert to the evolution of international financial markets, given that an improvement in their behavior and considering the growth outlook for the Mexican economy and for inflation, in the context of great monetary slack in the principle advanced and emerging countries, could make it advisable to relax monetary policy," the Bank of Mexico said April 27.

The minutes noted, as the board did in the June 8 policy statement, that the majority of members believe the "balance of risks for inflation remains unchanged," though some think it has deteriorated.

On the upside inflation risks, the majority agreed that "while until now there has little passthrough from the exchange rate to inflation, there is the possibility that this situation could change" especially in the absence of a solution to the euro zone crisis, which could increase currency volatility.

However, the members stressed that "the recent depreciation of the peso against the dollar is due to volatility resulting from the worsening of problems in the euro zone" but they noted that analysts expect the "depreciation will reverse itself in the near future, in line with the fundamentals of the Mexican economy."

And while the board was upbeat about the possibility of continued moderate growth, the majority said "the balance of risks for growth in Mexico has deteriorated," citing the main risks as the crisis in Europe and financial markets as well as the outlook for moderate U.S. growth.

At the policy meeting this month, the central bank kept the benchmark rate on hold at 4.5%, where it has been since August 2009.

In it's quarterly inflation report last month the Bank of Mexico reaffirmed the inflation forecast for 2012 and 2013 of 3.0-4.0%, though the rate should slip closer to the lower end of the range next year. Core inflation is likely to be close to 3.0% this year and next, the report said, although the average next year will be lower than in 2012.

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