By Juan Montes
MEXICO CITY--The Bank of Mexico stood pat on rates on Thursday
for a ninth consecutive policy meeting, amid slow economic growth
and low inflation, while authorities took fresh measures to support
a weak peso through increased dollar auctions.
The country's foreign exchange commission, formed by officials
of the central bank and the Finance Ministry, said shortly after
the rates announcement that it is increasing the amount of dollars
to be sold at auctions to address continued exchange market
volatility.
The peso reacted immediately, appreciating around 1.2% against
the U.S. currency. In early trading, the peso hit a new historical
low against the dollar, on news the U.S. economy accelerated in the
second quarter, increasing chances for a Federal Reserve rate
increase in September.
Some analysts said the new measures are limited and will hardly
prevent the peso from depreciating in the coming weeks. "The
auctions show the Bank of Mexico is worried. But the bank is not
going to play the market's game, to the extent of putting reserves
at risk. The peso is going to go where the market wants," said
Alfredo Coutiño, Latin America director at Moody's Analytics.
The Mexican peso is the most-traded emerging-market currency and
has taken a hit in recent months from the expected Fed rates move,
as higher returns in the U.S. would make the dollar more attractive
for investors than riskier currencies.
Mexico's central bank said "possible monetary policy action from
the Federal Reserve could have additional impact on the exchange
rate." The bank added that it's paying particular attention to the
exchange rate and the Fed's monetary stance.
But the Bank of Mexico stopped short of raising interest rates
before the Fed and kept the overnight lending rate at a record-low
3% to keep supporting an economy that has been slowing this year.
Policy makers had ruled out a pre-emptive rate increase.
The central bank said on Thursday that the outlook for growth
has worsened in recent months. Economic growth in May, the latest
data available, was just 0.1%, with industrial production
contracting and household consumption only marginally
recovering.
"They have also resisted rate hikes in order to keep government
financing costs low, in a moment when the government is trying to
reduce its budget deficit," said Mr. Coutiño.
Instead, authorities are trying to support the peso through
dollar auctions.
Starting on Friday and at least through the end of September,
the central bank will raise to $200 million from $52 million the
amount of dollars it sells each day. The commission also reduced to
1% from 1.5% the amount the peso has to weaken for the central bank
to sell an additional $200 million. That means the bank would have
to use at least $8.8 billion in reserves in the next two
months.
The commission said Mexico has adequate foreign reserves as well
as a $70 billion flexible credit line with the International
Monetary Fund and could take further actions if necessary. Foreign
reserves stood at $191 billion last week.
The central bank is widely expected to start raising interest
rates in September if the U.S. Federal Reserve does, to stop the
depreciation of the peso and avoid a rise in inflation
expectations.
Mr. Coutiño said he expects the Bank of Mexico to increase rates
at a quicker pace than the Fed and sees Mexico's overnight interest
rate ending the year at 3.75% or 4%.
The economic slowdown has limited any inflationary impact that a
weak peso could have through more expensive imports. Annual
inflation hit its lowest level since 1970 at 2.76% in early July,
well below the central bank's 3% target. The bank expects inflation
to end the year below 3%.
With inflation at historically low levels and the economy moving
at a slow pace, only a weak peso has prevented further monetary
easing. The bank's last move was a rate cut in June of 2014.
The main goal of Mexico's central bank is to control inflation,
and to guarantee stability in the purchasing power of the peso.
Gov. Agustín Carstens has said that despite the 20% depreciation of
the peso in the past year, markets have been functioning orderly
most of the time.
In Thursday's policy decision, the central bank's s five-member
board said the manufacturing nonautomotive sector, the core of
Mexico's export engine, as well as the construction and mining
sectors, are still weak.
Mexico has been hurt by lower oil production, which has fallen
8% in the past year, and the 50% drop in oil prices. Lower oil
revenue forced the Mexican government to cut $8.3 billion in
spending this year to protect public finances, which is expected to
further hurt the economy.
Write to Juan Montes at juan.montes@wsj.com