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Mexico’s central bank raises key interest rate to 7.75% … FT June 21, 2018 at 07:51PM

Mexico’s central bank raises key interest rate to 7.75% … FT

 

Mexico’s central bank raises key interest rate to 7.75%

By Jude Webber

The Bank of Mexico on Thursday increased its key interest rate by 25 basis points to 7.75 per cent, the highest in more than nine years, as the peso weakened, inflation prospects worsened a touch and risks surrounding the future of Nafta hinted at more
volatility to come.

In a sign of just how the market has adjusted to the widely held prospect of a victory by nationalist Andrés Manuel López Obrador in July 1 presidential elections — a result expected to put further, if temporary,
pressure on the peso — BBVA Bancomer made no mention of election jitters as a factor driving the decision in a note to clients this week anticipating the rate rise.

“Although short-term inflation risks are still contained in our view, and the room for a more restrictive stance of monetary policy seems limited . . . a new speed bump in inflation’s downward trend is likely
in the short term,” BBVA Bancomer said in the note, predicting a cautious rate rise, “which markets have already priced in”.

The peso, which firmed in the first four months of this year, has fallen sharply since April. Expectations of a rate rise rose to 80 per cent of participants of a monthly Citibanamex survey of market participants
released earlier on Thursday, up from nearly 50 per cent a month ago.

It was Banxico’s last monetary policy decision before the election. If polls are correct and Amlo, as he is known, takes the presidency, one of the first things he will do is hold a news conference with the central
bank’s governor, Alejandro Díaz de León, to reassure markets immediately about his vow not to compromise the bank’s independence, one senior aide told the FT.

The Citibanamex poll found the market was expecting no further rate rises this year. It saw a fall in rates by the end of next year to 6.75 per cent from 7 per cent previously. The poll also predicted the peso
would weaken to end the year at 19.5 to the dollar from 18.95 a month ago.

Inflation this year, meanwhile, is expected to tick up to 4 per cent from a previous expectation of 3.96 per cent. Growth forecasts remained unchanged at 2.2 per cent this year and 2.3 per cent next year.

“Even though a weaker peso should not trigger an additional pass-through round in the near-term unless it weakens further, and there are no demand-side pressures, energy prices will be limiting headline inflation’s
downward trend pace,” BBVA Bancomer noted.

 

Read More: Mexico’s central bank raises key interest rate to 7.75% … FT

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