Banxico Zeroes In on Current Account Gap as the Peso Weakens

  • Central bank raised key rate a half point to 4.25% on June 30
  • Decision was unanimous as inflation, growth deteriorate

Mexico’s central bank raised concerns about the nation’s widest current account deficit in 17 years, indicating the risks of a further decline in the peso whose plunge to record lows already triggered two interest rate increases this year.

Banco de Mexico highlighted the deficit in Thursday’s minutes from its June 30 meeting, when it raised borrowing costs 50 basis points to 4.25 percent, adding that while the nation’s growth outlook has deteriorated, inflation is accelerating.

The central bank has taken measures 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 more than economists expected last month. Policy makers say they will tighten monetary policy again if needed and will be on alert to the growing current account gap, leading some analysts to forecast another move by Banxico soon.

"The current account is very important," said Delia Paredes, the executive director of economic analysis at Grupo Financiero Banorte SAB in Mexico City. "It could put pressure on the exchange rate, and there’s the question of how to finance it, so it makes sense to raise interest rates." Banorte expects another 50 basis point hike in September.

Mexico’s current account deficit has widened to 3.15 percent of gross domestic product as oil exports fall. The majority of Banxico board members have suggested that Mexico take further action to improve its public finances after the Finance Ministry announced a second round of spending cuts last month. The central bank board meets again on Aug. 11 to decide on rates.

The choice to raise rates last month, even after the nation’s growth outlook deteriorated, highlighted how far global factors, such as Brexit and the odds of more international financial market volatility, are overshadowing domestic considerations.

The peso strengthened 0.3 percent to 18.315 per dollar at 9:42 a.m. in Mexico City.

Annual inflation has remained below the central bank’s 3 percent target for a year and unexpectedly slowed in June. Nevertheless, the peso’s weakness continues to raise concern of an increase in consumer prices, an effect known as pass-through.

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