Mexico Keeps Key Rate Unchanged, Focus on Peso Risk and Fed

  • Currency has climbed more than 8% from record low in February
  • Policy makers on hold for second decision after surprise raise

Mexico’s central bank kept its overnight interest rate unchanged, balancing between a focus on the risk for a renewed drop in the peso and the nation’s posture relative to the Federal Reserve.

Banco de Mexico held the overnight rate at 3.75 percent Thursday as forecast by all 26 economists surveyed by Bloomberg. While policy makers said that the risks to global growth have increased, and that monetary stimulus in some developed nations raises the chances for instability of the international financial system, they said the risks for inflation and growth in Mexico are unchanged since their last decision in March.

Mexico’s coordinated mid-February moves, when the central bank raised the key rate between scheduled decisions and the Finance Ministry announced spending cuts, have been "quite successful" in stabilizing the peso, Governor Agustin Carstens said in an interview last month. Given that the key rate remains near an all-time low, the central bank can increase borrowing costs gradually and in line with the the Fed without hurting the economy, Carstens said in the interview.

"It’s a neutral statement, and there’s very little change with respect to the previous one," said Marco Oviedo, chief Mexico economist at Barclays Plc in Mexico City. "They’re still concerned about the global growth fragility and financial turmoil, and this is the major risk to inflation. However they acknowledge that inflation conditions are very favorable."

The peso maintained its loss, dropping 0.4 percent to 17.8654 per dollar at 2:30 p.m. in Mexico City.

Policy makers said they expect inflation to average around their 3 percent goal this year and remain near the same level in 2017. A deterioration in international conditions could cause a further peso decline and spur inflation, policy makers said in the statement accompanying their decision. Inflation slowed to 2.6 percent in March, near the December reading that was the lowest since the late 1960s.

A report last week showed the economy expanded 2.7 percent in the first quarter, more than analysts forecast, led by consumer spending and a slight rebound in industrial output. While that’s near the top of the central bank’s current 2 percent to 3 percent forecast for the full year, policy makers’ had lowered their estimate in March from the 2.5 percent to 3.5 percent that they expected as of the end of last year.

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The peso has rebounded 8.7 percent from a record low on Feb. 11, a move that followed the central bank’s surprise half-point rate increase, higher oil prices and diminished projections for Fed rate increases. But the recovery hasn’t been constant. The currency fell 4 percent over the past four days, heading for its biggest weekly decline since December, as part of a sell-off in emerging-market currencies on speculation the Fed may still raise borrowing costs in June despite weak global growth.

Mexico’s swaps curve shows traders expect at least a half point increase for Latin America’s second-largest economy by year end. By contrast, the futures market reflects just a 51 percent chance the U.S. will raise rates at all by year end. They also show only a 10 percent chance for a move higher next month, with Friday’s jobs report a key indicator to determine the odds.

"If the Fed hikes in June, I think Banxico will follow," Oviedo said.

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