Mexico Keeps Rate at Record Low 3%, Expands Currency Support

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Mexico’s central bank kept borrowing costs unchanged at a record low, saying the outlook for growth has worsened, while also expanding programs designed to prop up the peso. The currency erased its loss.

Banco de Mexico’s board, led by Governor Agustin Carstens, left the overnight rate at 3 percent Thursday, as forecast by all 29 economists surveyed by Bloomberg. At the same time, the nation’s currency commission announced an expansion of daily dollar sales and a lower trigger for a separate extraordinary dollar sale.

The peso tumbled to a record low earlier today on expectations the U.S. is nearing an interest-rate increase, and the bank had warned currency weakness could spur inflation. While the economy remains weak and the inflation rate is at the lowest in almost half a century, policy makers have said they may need to raise borrowing costs to preserve Mexico’s rate differential with the U.S. and protect financial stability.

‘Bold Move’

The central bank “got closer to a rate hike today when it noted it will be necessary to adjust monetary policy in a timely way,” Alonso Cervera, chief Latin America economist for Credit Suisse Group AG, said in an e-mailed response to questions. As for the currency measure, “this was a very bold move that should give support to the currency in upcoming days.”

The peso was little changed at 16.2972 per U.S. dollar at 2:03 p.m. in Mexico City from 16.2905 Wednesday, erasing an earlier loss of as much as 1.2 percent.

The peso has been trading at record lows in recent days after tumbling 20 percent in the past year through Wednesday, reflecting expectations for higher U.S. rates and the impact of low crude prices on growth in Mexico. The central bank in today’s statement reiterated that the peso’s inflation impact has been limited mainly to durable goods and said the balance of inflation risks in the short term has improved.

Policy makers repeated their forecast for inflation to remain below 3 percent for the rest of this year.

Fragile Economy

Mexico’s economy remains fragile. Industrial production unexpectedly contracted in May from a year earlier on a non-seasonally adjusted basis amid weak manufacturing.

Still, policy makers will raise borrowing costs this quarter as the Fed lifts rates, according to the median forecast of economists surveyed by Bloomberg.

“If the Fed hikes, Banxico will hike at the same pace and time as the Fed,” Benito Berber, an analyst at Nomura Holdings Inc., said by telephone from New York.

At their previous rate meeting in June, the majority of the central bank’s five-member board said they were trapped between a sluggish domestic economy and expectations for higher U.S. rates. Barring a jump in inflation expectations, most board members said the disadvantages of raising interest rates before the Fed would outweigh the benefits, according to the minutes of the meeting.

Half-Century Low

Mexico’s inflation rate fell to 2.87 percent in June, the lowest since 1968, from 2.88 percent in May. Weak growth, smaller gasoline cost increases, reduced rates for telephone services and summer electricity subsidies have contributed to lower inflation.

Since October, economists have cut their 2015 economic growth forecasts by more than a percentage point to 2.6 percent, a central bank survey showed July 3.

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