Goldman Sachs Says Mexico Peso Plunge Poses Threat to Inflation

  • Peso is world's worst-performing major currency in 2016
  • Central bank may use rate policy response, Goldman Sachs says

The plunge of Mexico’s peso is threatening to spur inflation in Latin America’s second-biggest economy, according to Goldman Sachs Group Inc.

“Although the inflation outlook is still relatively comfortable, the relentless MXN depreciation pressure in recent months adds visible upside risk to the inflation outlook despite still-sluggish real activity dynamics and evidence of just moderate pass-through,” Goldman Sachs analysts including chief Latin America economist Alberto Ramos wrote in a research note Wednesday.

The peso has fallen 8.8 percent against the dollar this year, more than any other major currency tracked by Bloomberg, as global commodity prices tumbled and concern over of a global economic slowdown sparked a selloff among emerging-market assets. The slide has been increasing the odds of higher borrowing costs in Mexico as consumer prices jump from the lowest level in almost half a century.

The central bank, led by Governor Agustin Carstens, held the overnight benchmark rate at 3.25 percent last week, saying in its statement that it will pay special attention to the peso and signaling that the currency now may be more important in determining borrowing costs than the U.S. Federal Reserve’s moves.

“We expect the authorities to attempt to anchor the currency first and foremost through continued rules-based FX market intervention mechanisms, which could eventually be complemented by a more conventional interest rate policy response,” the analysts wrote.

The central bank said Jan. 28 that it would extend through March its program of offering $200 million daily in auctions triggered when the peso weakens by 1 percent from the previous day’s fixed rate and an additional $200 million when the currency weakens 1.5 percent.

The peso lost 0.4 percent to 18.8675 per U.S. dollar at 11:29 a.m. in Mexico City.

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