One of the primary goals of Mexicos central bank, Banco de México, is to defend the currencys purchasing power, which is to say, to try to keep inflation in check.
Although for the past several years the banks forecasts have invariably hovered around 3 percent, with the famous proviso of plus-minus one percentage point, the actual inflation reading has not been too far off the mark. Last year, it was 4.5 percent, and the outlook for this year is about the same.
Last week, in a Bloomberg Television interview in Helsinki, Banco de México Governor Agustín Carstens said Mexicos economy still has slack before reaching full capacity, which is keeping consumer prices in check and enables policy makers to hold off on raising rates.
We will look into the output gap together with other indicators, Carstens said. Until we see that the convergence to our 3-percent permanent goal is in danger, then we might adjust the policy.
The nations annualized inflation rate for March fell to 3.04 percent, the slowest in more than five years, allowing the central bank to hold its target rate at a record-low 4.5 percent. The central bank has maintained the rate at that level since July 2009.
The output gap, or the difference between the level of economic activity and the countrys production capacity, may close in the second half of the year, Carstens said. The economy expanded 5.5 percent last year after contracting 6.5 percent in 2009. Finance Secretary Ernesto Cordero forecasts the economy will grow 4.2 percent this year, as consumer spending rebounds and exports surge.
However, global economic upheaval, such as last weeks mad fluctuations in the prices of such commodities as oil and silver, have forced the Finance Secretariat to adjust its growth forecast several times this year.
But back to Carstens. He noted that with the March inflation number, Mexico is very close to our permanent objective of 3 percent. Consumer prices are behaving quite well and may fluctuate in a range of 3 percent to 4 percent this year, he said.
At the close of last weeks trading on Friday, the peso advanced 1.2 percent to 11.5880 per U.S. dollar, from 11.7289 at the close Thursday. This week, analysts see a continuation, albeit slight, of the revaluation trend.
Meanwhile, the yield on Mexicos 10-percent peso bond due 2024 fell 3 basis points, or 0.03 percentage point, to 7.40 percent, according to Banco Santander. The price of the security rose 0.25 centavo to 122.20 centavos per peso.
On farm commodity prices, Carstens said a seasonal jump in food prices wont jeopardize the central banks inflation target. The price of food items is also something that might give us some awkward lift to our inflation, but it should be contained in the range, Carstens said.
A stronger peso, which has rallied 6.3 percent against the dollar this year, is helping contain inflation, Carstens said. The pesos gain makes it cheaper to import consumer goods and component parts from the United States.
Regarding the first-quarter purchase of 100 tons of gold by the central bank, which shelled out US$4.5 billion to diversify reserves , Carstens said Banco de México is buying gold to obtain the best risk-return balance for its investments and wont necessarily continue purchasing bullion this year.
Given the performance gold has had in the recent past, it turns out it would allow us to have a higher return without much risk, Carstens said. Total gold holdings amount to 4 percent of the banks reserves of over US$128 billion.