Mexico Policy Makers Signal Continued Focus on Fed in 2016

  • Banxico raised benchmark rate for first time since 2008
  • Fed's moves outweighed domestic factors for central bank

Mexican policy makers were unanimous in their decision to raise borrowing costs this month for the first time since 2008, signaling they will continue to react to higher interest rates in the U.S. in the coming months. The peso extended its gain.

Even as domestic factors argued for leaving the benchmark rate at a record low, the central bank’s board was concerned that narrowing the nation’s rate advantage relative to the U.S. could cause financial instability that would spur inflation, according to minutes of the Dec. 17 meeting published Thursday. Looking forward, policy makers said they’ll focus on Mexico’s monetary posture relative to the U.S., the peso’s impact on inflation and the evolution of economic growth.

“They’ve signaled that they’re very concerned with the rate spread between Mexico and the U.S.,” said Marco Oviedo, the chief Mexico economist at Barclays Plc. "It seems they want to be cautious and play it safe.”

Banco de Mexico’s board, led by Governor Agustin Carstens, lifted the overnight rate to 3.25 percent from 3 percent on Dec. 17, as forecast by 21 of 26 economists surveyed by Bloomberg. The increase came a day after the Federal Reserve raised U.S. rates, exiting record lax monetary policy that encouraged investors to pour money into the higher-yielding securities of developing nations.

The peso strengthened, rising the most among emerging-market currencies, after the minutes showed the central bank will likely match interest-rate increases from the Fed, said Roberto Galvan, a currency trader at Intercam Casa de Bolsa in Mexico City.

“We already knew that, but the bank goes into a bit more detail about it in the minutes and that is contributing" to the move, along with a report showing a rise in U.S. jobless claims, Galvan said.

The peso added 0.8 percent to 17.2367 per dollar at 11:17 a.m. in Mexico City.

Mexico’s growth outlook has improved amid strengthening investment and consumption, while inflation is likely to stay near policy makers’ 3 percent target over the next two years, according to the minutes. Prices rose 2.21 percent in November from a year earlier, the lowest annual inflation rate since 1968.

"While domestic conditions would seem to suggest the convenience of holding rates steady, in light of the increase in U.S. rates, not adjusting Mexico’s benchmark rate could generate an additional depreciation of the peso that may be disorderly and could affect inflation and its expectations," the majority of the central bank’s board said in the minutes.

While the peso weakened 25 percent the last year and a half through Wednesday and fell to a record low earlier this month, most policy makers said that the decline has been gradual and orderly. The currency’s decline hasn’t generated second-order effects on non-tradable goods and services, the central bank said.

Banxico has spent more than $24 billion in 2015 on intervention programs to support the currency. The Fed’s increase on Dec. 16 briefly reduced Mexico’s rate premium over the U.S. to 2.5 percentage points, the smallest since 2008.

Mexico’s “link to the path of monetary policy normalization in the U.S. is still quite strong," said Alberto Ramos, chief Latin America economist at Goldman Sachs Group Inc. in New York. “It’s still a key source of anxiety, of concern, what the Fed is doing and how global markets digest that normalization.”

Economic growth is likely to climb to 2.45 percent this year, the highest since 2012, according to a survey of private-sector analysts released by the central bank this month. The expansion will probably accelerate to 2.7 percent next year, the survey showed.

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