Reuters
UPDATE - Mexico's central bank tightens monetary policy
Friday February 20, 10:14 am ET
MEXICO CITY, Feb 20 (Reuters) - Mexico's central bank tightened monetary policy on Friday for the first time in nearly a year, showing it will not tolerate inflation beyond its target range despite warnings the move could squelch a budding economic recovery.
As expected by many in Mexico's financial markets, the central bank said it increased its money market "short" to 29 million pesos per day from 25 million pesos.
The "short" keeps liquidity in the secondary market lower than its needs, which tends to force up rates, dampen spending and quell inflation. It is the central bank's main tool for keeping inflation in check.
"Considering the recent deterioration in inflation outlooks that seemed to start to affect salary negotiations, the central bank board has decided to increase the short to 29 million pesos daily from February 20," the central bank said in its statement.
Tighter monetary policy was anticipated after annualized inflation in January hit 4.20 percent, above the central bank's target range of between 2 and 4 percent which it has vowed to monitor on a month-by-month basis
Mexico's economy has recently shown signs of breaking out of a three-year slump, although economists worry higher rates could strengthen the peso's value and thus make Mexico's exports more expensive abroad.
That would be bad news for a country that has had trouble competing with the cheap labor of China and Central American countries. Mexico lost market share last year in the United States, where it sends about 90 percent of its exports.
Thousands of Mexican "maquiladora" factories, which import raw materials and then export them duty free back across the U.S. border, are expected to be the main engine for economic growth projected by the government at over 3 percent this year.
Analysts said inflation in January was primarily due to seasonal factors rather than economic growth, but the bank still sought to send a message it would keep strict discipline in line with last year's inflation, a 35-year low of 3.98 percent.
Mexico's government hopes that stability in key indicators like inflation will spur confidence and investment in Latin America's No. 2 economy, which is now one of the region's most stable economies after decades of turmoil.
The short had not been modified since March 2003 and already was at a level considered restrictive by traders.
The peso strengthened this week ahead of the central bank's bimonthly review of monetary policy. Higher interest rates draw more investors to the higher yields of Mexican securities, pushing up the local currency's value. |
