Mexico Raises Overnight Rate After Trump’s Win Wallops Peso

  • Carstens said last week he’d wait and see how markets react
  • Banxico had previously raised rates 1.5 points this year

Mexico Central Bank Raises Overnight Rate to 5.25%

Mexico’s central bank raised borrowing costs for the fourth time this year after Donald Trump’s election dragged the peso to never-before-seen levels of more than 20 per dollar, boosting the risk of faster inflation.

Policy makers increased the key rate a half point to 5.25 percent Thursday, the highest level since 2009. Most of the 23 economists surveyed by Bloomberg beforehand expected a half-point increase, with the rest split between a hike of three quarters of a point and a full-point. The peso fell 0.9 percent to 20.3859 per dollar at 3:18 p.m. in New York, signalling that the market may have expected a bigger increase or more measures.

Before the election, central bank Governor Agustin Carstens said he and the Finance Ministry had a contingency plan for panicked markets. So when Trump’s victory sent the peso plunging as much as 12 percent and Mexico’s government took no action, attention shifted to today’s meeting. The statement following the meeting focused on the risks of pass-through from peso depreciation to consumer prices and said that the rate hike seeks to counter price pressures and keep inflation expectations anchored.

Today’s decision is meant to "avoid having the depreciation un-anchor inflation expectations," Carlos Capistran, the chief Mexico economist at Bank of America Corp., said in an e-mailed response to questions. "We expect the next movement to be a quarter-point hike in December with the Fed."  

Economists have expected strong steps by Banxico amid concern Trump will curb free trade, which to Carstens would be  a "hurricane" for a nation that sends almost 80 percent of its exports to the U.S. The outlook for the consumer price index as well as the economy have deteriorated., the central bank said in the statement accompanying today’s decision.

"The environment that the national economy faces now is characterized by elevated uncertainty," the bank said."While it is still difficult to identify the specific elements that will define the United States’ economic policy stance in its bilateral relationship with our nation as of 2017, the risks involved have had a major impact on national financial markets."

Trade, Tariff Jitters

Carstens has taken bold steps this year to bolster the currency. Policy makers have raised rates three times prior to today, including at an unscheduled meeting in February that accompanied a coordinated action with the Finance Ministry to sell greenbacks.

Blackrock Inc. had forecast the central bank would boost the key rate as much as 2 percentage points today as uncertainty spread following Trump’s win. The Republican pledged during his campaign to renegotiate or scrap the North American Free Trade Agreement with Mexico, boost tariffs and to build a border wall and make Mexico pay for it.

Since then, the president-elect has backtracked on some of his promises, saying he may build fences along parts of the border, leading the exchange rate to rebound slightly earlier this week.

The peso is still the worst performing major currency this year after the British Pound, falling 15 percent through Wednesday. And yet inflation has remained "very well behaved," while pass-through from the exchange rate’s depreciation to consumer prices has been "very modest," deputy central bank Governor Manuel Sanchez said in a Nov. 11 interview.

Inflation quickened less than expected in October to a level just above the central bank’s 3 percent target range for the first time in 18 months. Trump’s win may elevate risks of pass-through, however, Sanchez said. One-year rate swaps tumbled after the decision, showing traders see less chance of further increases in borrowing costs.

"There are still many unknowns that will be cleared over time, and the central bank has to save some ammunition in case it needs it later," Alonso Cervera, chief Latin America economist at Credit Suisse Group AG said before the decision. "The game hasn’t started. We only know who the pitcher will be, ie Trump, and we don’t know if he’ll use sliders, fastballs or curve balls."

— With assistance by Rafael Gayol

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