MEXICO CITY (Reuters) – The Bank of Mexico’s governor said a pause in its cycle of interest rate cuts gives policymakers options depending on trends in inflation and that the country’s economic recovery is more closely mirroring the bank’s more optimistic forecasts.
“That is why we made the decision to take this pause and keep the rate at its current level,” central bank governor Alejandro Diaz de Leon told Reuters in an interview late on Thursday, elaborating on a policy decision earlier in the day.
“We feel that it gives the central bank options depending on both incoming data on inflation and the factors that affect inflation so we can better identify what to do,” Diaz de Leon said.
The central bank surprised financial markets by keeping its benchmark interest rate unchanged at 4.25%, citing the need for a “pause” to weigh inflationary pressures as it held borrowing costs steady for the first time in nearly 1-1/2 years.
Analysts in a Reuters poll had narrowly forecast a 25 basis point cut.
Diaz de Leon said conflicting data and volatility in inflation and markets complicated monetary policy decisions.
“We have clearly seen from September to now many variables that have moved in different directions and that are hard to identify,” he said.
Mexico’s economic recovery is closer in line with the two more optimistic scenarios laid out by the central bank in its last quarterly economic report and looking less like the most pessimistic of its forecasts, he added.
In a V-shaped economic scenario, Mexico’s economy is seen contracting by 8.8% in 2020 and expanding 5.6% in 2021. In a deep V-shaped scenario, the economy will shrink 11.3% in 2020 and grow 2.8% in 2021.
In the most pessimistic deep U-shaped scenario, the economy will contract 12.8% in 2020 and grow 1.3% in 2021.
“The kind of recovery we’ve seen and the latest data is closer to the V and deep V trajectories that we had in the previous (quarterly) report,” said Diaz de Leon.
The economy grew 12.0% in the third quarter, making up for much of the record contraction over the previous three months at the height of the coronavirus lockdown.
(Reporting by Anthony Esposito; Editing by Kim Coghill)