Banxico Deputy Worried More Peso Weakness May Spur Inflation

  • Banxico raised key rate to 3.75% in surprise move last month
  • Concerns about China growth could spur volatility: Sanchez

Mexico central bank deputy governor Manuel Sanchez said he is concerned about the risks for further peso depreciation, which could trigger inflation and spur policy makers to raise the key interest rate again.

While the nation’s currency has climbed 5.6 percent in the three weeks since Banco de Mexico unexpectedly lifted its key rate between scheduled meetings, there’s no guarantee that global factors including concerns about China won’t spur a renewed drop, Sanchez said Tuesday.

Policy makers could raise the key rate even without an increase by the Federal Reserve should peso weakness begin to spur inflation, said Sanchez, one of five board members who votes on monetary policy. He said that extraordinary decisions like the one last month to adjust interest rates outside the central bank’s regular meeting schedule shouldn’t become the norm, they’re an option when the situation is urgent.

"Although some models may say the peso is undervalued, it doesn’t give me personally any assurance that it’s going to strengthen in the coming months," Sanchez said in an interview at Bloomberg’s offices in Mexico City. "There’s a risk of a further depreciation of the peso against the dollar that could end up contaminating inflation."

The central bank, led by Governor Agustin Carstens, surprised investors on Feb. 17 by raising the nation’s key interest rate half a point to 3.75 percent and introducing discretionary dollar sales in an effort to head off a rise in inflation expectations stemming from a weak peso. The moves were coordinated with the decision by President Enrique Pena Nieto’s administration to cut spending.

The peso dropped 1 percent to 17.9224 per dollar at 2:25 p.m. in Mexico City. The currency slumped to a record low last month before the rate increase was announced on falling oil prices and concerns about global growth.

Inflation slowed to 2.13 percent in December, a level last seen in the late 1960s, after the government moved to end monthly gasoline price increases and did away with long-distance phone connection fees, outweighing the impact of the weaker currency on import prices. While the pace of consumer price increases quickened to 2.61 percent in January, it remains below the central bank’s 3 percent goal. Policy makers last week said they expect inflation to be slightly above their target in the second and third quarters.

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