Policy Maker Says Mexico Likely to Raise Rate in Coming Months

  • Banxico kept borrowing costs at 3.75% at meeting in early May
  • Peso has weakened recently; Fed signaled hike may come in June

Mexican policy makers were unanimous in their decision to keep the key interest rate unchanged at their meeting this month, with one central bank member saying they’re likely to raise rates in coming months.

Banco de Mexico’s board, led by Governor Agustin Carstens, maintained the overnight rate at 3.75 percent on May 5, as forecast by all 26 economists surveyed by Bloomberg. The Banxico member who saw a rate increase as likely also said there’s room to do so without significantly affecting growth, echoing comments in April by Carstens that Mexico could lift borrowing costs gradually and in line with the Fed without hurting growth.

The central bank focused on the risk of a renewed drop in the peso and the nation’s posture relative to the Federal Reserve, according to the statement accompanying its May decision. Since then, the currency has depreciated further and Fed officials said Wednesday that a June rate increase was likely if the world’s biggest economy continued to improve.

"They sound a bit more hawkish" than in the initial statement accompanying the rate decision on May 5, said Benito Berber, senior economist for Latin America at Nomura Holdings Inc. "The probability that they hike beyond what the Fed does by the end of this year is rising significantly."

The board raised borrowing costs by a half-point at an unscheduled meeting on Feb. 17, and began discretionary dollar sales the same day with the Finance Ministry to bolster the the country’s currency.

Still, the peso dropped 6.9 percent this month through Wednesday, the worst performer after the South African Rand among 16 major currencies tracked by Bloomberg. The currency slid 0.3 percent to 18.5051 per dollar at 9:47 a.m. in Mexico City. Meanwhile, annual inflation slowed in both March and April, reaching 2.54 percent last month, below the central bank’s 3 percent target.

One-year interest-rate swaps climbed Thursday, heading for their biggest weekly gain
since February. The swaps curve now reflects expectations for rate increases of 0.75 percentage point by year end, compared with 0.5 percentage at the end of last week.

"Despite low inflation in Mexico and the perspective of a negative output gap within the time frame that monetary policy can influence, the most probable course for the benchmark interest rate in coming months is an increase," one Banxico board member said.

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