• Banxico raised rate more than expected on June 30 to 4.25%
  • Peso is worst-performing major currency this year after Pound

Despite the Mexican peso’s plunge, its impact on driving up inflation is minor as the central bank has worked to keep consumer prices in check, deputy Banxico Governor Manuel Sanchez said.

During an interview in Los Angeles, Sanchez, who analysts consider among the most hawkish members on Banco de Mexico’s board, played down the risks of pass-through from the currency to inflation and instead alluded to the central bank’s credibility and interest rate decisions as limiting risks to inflation.

That contrasts with Sanchez’s statements from an interview in March when he said he was concerned that further peso depreciation could trigger inflation and spur policy makers to raise the key interest rate again, which is what they did in June. Led by Governor Agustin Carstens, the central bank has taken bold measures this year to bolster the currency in order to head off inflation, surprising markets by raising the rate half a point at an unscheduled meeting in February and then raising them by the same amount in June, more than economists expected.

"Perhaps there has been some gains in terms of the effectiveness of monetary policy for containing inflation," Sanchez said during the interview on the sidelines of an event hosted by the U.S.-Mexico Chamber of Commerce. That can be seen in the "resilience that the long-term inflation expectations have exhibited throughout this rather volatile period."

Inflation has remained below the central bank’s 3 percent target for 14 consecutive months, even as the peso has touched record lows. Yet, the central bank’s rate increases have done little to stem the currency’s slide. The peso has weakened 8.3 percent this year after the Federal Reserve raised its key rate in December, plunging oil prices reduced the revenue available to fund government outlays and global risks increased. That’s the worst performer among major currencies tracked by Bloomberg after the British Pound.

Sanchez did raise some concerns about cost of living increases during a presentation before the interview, saying that rising core inflation is a worrisome trend. He also said that the peso’s drop is due to its role as a liquid currency, Mexico’s weakened fiscal position and geopolitical concerns.

Mexico’s consumer prices rose more than expected in early July, led by gasoline and transportation, lifting the annual inflation rate to the highest level since February. A bond-market gauge known as the breakeven rate climbed to the highest level in three years this week.

Sanchez said Mexico needs to improve public finances, echoing calls that board members have made for authorities to take further action after the Finance Ministry announced a second round of spending cuts in June. The central bank raised concerns about the nation’s widest current account deficit in 17 years in the minutes of its June 30 rate decision.

"Mexico needs a stronger fiscal position," Sanchez said.

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