Mexico's Central Bank Keeps Interest Rates at Record Low for Now

July 31, 2015Mexicoby EW News Desk Team

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Central bank authorities decided to keep rates at a record 3.0 percent in the wake of Mexico's sluggish growth, according to Bloomberg Business. In an effort to mitigate the economic fallout, the bank has taken measures to boost the peso, which has tumbled in reaction to the possibility of the U.S. Federal Reserve raising interest rates.

Mexico's central bank has two primary goals: preserving purchasing power of the peso and controlling inflation. Although banking officials kept rates at current levels, the idea of a rate hike is not off the table, especially since U.S. rate hikes may come soon. The United States saw growth in the second quarter, leaving analysts to speculate that the Fed would most likely raise rates. Experts also note that borrowing costs in Mexico will rise with the Fed increase.

Mexican banking officials overwhelmingly agreed that a rate hike before U.S. adjustments would be costly to the Mexican economy, and they maintain that a borrowing cost increase would keep pace with U.S. rates and preserve economic stability. However, the United States is not the only external factor that Mexico is worried about, most notably the heavy toll that lower oil prices are having on Mexico's economy, and the price decline is another reason behind peso devaluation.

In response to a low peso, the central bank is boosting the number of dollars sold during auctioning. The bank will go from $52 million to $200 million of the amount of dollars being sold daily. The plan will stretch into September, and the central bank reduced the depreciation threshold from 1.5 percent to 1.0 percent to auction another $200 million. The peso has encountered 20-percent depreciation in the past year. The peso is the most popular emerging market currency on the trading sphere, but a U.S. rate increase would yield returns that are more lucrative for investors, shoving aside volatile currencies such as the peso.

In other areas of the Mexican economy, manufacturing unexpectedly dropped in May, with domestic consumption only increasing on a marginal basis, and Mexico only expanded 0.1 percent that same month when compared to April. Mining and construction also weakened. May's performance marked the economy's worst annualized performance in nine months, and Mexican growth stood at 1.5 percent that same month in 2014. Oil production also fell 8.0 percent in 2015, forcing the government to cut vital spending measures. Authorities note that Mexico remains in good standing, as the country has a $70 billion line of credit with the International Monetary Fund, and the nation has enough foreign reserves in the amount of $191 billion, as of July.

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