By Juan Montes
MEXICO CITY--Mexico's central bank stood pat on rates Thursday,
as widely expected, adopting a cautious stance ahead of a potential
rate increase in the U.S.
The Bank of Mexico left the overnight interest-rate target
unchanged at a record low 3%. The central bank has cut rates four
times in the last two years to support a sluggish economy.
But increasing expectations that the U.S. Federal Reserve will
raise rates in coming months for the first time since 2008 has led
Mexico's central bank to start considering a tightening of monetary
policy to support the peso.
The central bank, in its statement Thursday, said it is "closely
watching" any change in Fed's policy and its impact on the exchange
rate.
Most analysts expect the Bank of Mexico to react to a Fed move,
rather than increasing rates pre-emptively, as economic growth
remains persistently slow. The consensus is that Mexico's central
bank will increase rates later this year.
Private consumption in Mexico showed signs of recovery at the
beginning of the year as retail sales expanded well above
expectations, but industrial production weakened. Inflation,
meanwhile, is now below the central bank's 3% target.
The Mexican central bank's five-member board said the economy
remains weak and that growth prospects have deteriorated, mainly
because of a slowdown in manufacturing exports. The bank also noted
its concern about falling oil production.
The expected rate increase in the U.S. has recently led to a
depreciation of the peso against the U.S. dollar and heavy
volatility in Mexican financial markets. Still, the most recent
statement from the Fed suggesting a first rate move won't come
until June or September has taken some pressure off the peso in
recent days.
In its policy statement, the Bank of Mexico said further peso
depreciation and episodes of volatility can't be ruled out,
"especially given the uncertainty surrounding the start of the
normalization of U.S. monetary policy."
Bank of Mexico Gov. AgustÃn Carstens has left the door open to
move before or after the Fed's expected decision to increase
rates.
Mr. Carstens has also said the central bank doesn't rule out
"more aggressive measures" to support the peso, an unusual
statement for a central bank seen as one of Latin America's most
orthodox, and one that generally adopts a hands-off approach to the
exchange rate.
Interventions could involve direct dollar sales by the bank if
there were a drastic move in the exchange rate, he said last
week.
The central bank has already launched two different types of
dollar auctions to increase dollar liquidity in the exchange
market. The bank is currently selling $52 million daily, and on
days when the peso weakens 1.5% from the previous session's fixing
it offers an additional $200 million.
The bank said the peso depreciation hasn't translated yet into
higher consumer prices, with inflation expectations well-anchored.
Annual inflation slowed to 2.97% in the first half of March, below
the central bank's 3% permanent target.
Write to Juan Montes at juan.montes@wsj.com