Mexico Unexpectedly Raises Rate to Avoid Inflation Spreading

Updated on
  • Banxico delivers sixth straight increase of lending benchmark
  • Inflation climbed to almost 6% in April, double Banxico target

Mexico’s central bank unexpectedly raised its key interest rate for a sixth straight meeting to keep an increase in consumer prices from deepening after inflation accelerated to almost double policy makers’ target. The peso erased its loss.

Banco de Mexico, led by Governor Agustin Carstens, lifted its benchmark by a quarter point to 6.75 percent Thursday, surprising most of the economists surveyed by Bloomberg. Thirteen expected the five-member board to raise by a quarter point, while 19 forecast policy makers would opt for a pause.

The increase in borrowing costs is meant to help the central bank deal with the challenge of anchoring mid- and long-term inflation expectations, policy makers said in the statement accompanying their decision. The balance of inflation risks has shown some deterioration, and the possibility of additional weakness in the peso amid an environment of uncertainty about Mexico’s relationship with the U.S. remains a vulnerability, the board said. Mexico’s inflation rate rose more than any analyst had expected in April, reaching almost 6 percent, after gasoline prices surged and the peso weakened.

"Banxico seems to think it has more work to do," Neil Shearing, the chief emerging markets economist of Capital Economics Ltd., wrote in an e-mailed research report.

While nowhere near the double-digit levels seen some two decades ago in the midst of the so-called Tequila Crisis, April’s inflation of 5.82 percent marked the longest sequence of increases in Latin America’s second-biggest economy since the mid-1990s. The last three monthly inflation readings have exceeded the median forecast of analysts surveyed by Bloomberg.

The central bank said that it will stay attentive to Mexico’s monetary posture relative to the U.S. and remain in a position to take necessary measures to meet its 3 percent inflation goal. Policy makers see inflation remaining well above the 4 percent upper limit of their target range this year, though starting to slow later in 2017. While the risks to growth remain biased toward the downside, there’s a perception that the chances of the most extreme external risks materializing have diminished, they said.

That jibes with economists’ growth expectations. Gross domestic product in the first quarter beat estimates as services proved resilient against inflation’s drag and concern that Donald Trump’s presidency would derail investment. While the outlook for the country’s economy in 2017 worsened after the U.S. election, it’s brightened recently as Trump backed off from earlier pledges to scrap the North American Free Trade Agreement and the peso rebounded as a result.

After weakening to an all-time low in January, the peso has since gained the most against the dollar of any major currency tracked by Bloomberg, rising 17 percent through yesterday to levels stronger than 19 per dollar. That’s near the best since the U.S. election in November. The currency was little changed at 18.7995 per U.S. dollar in afternoon trading in New York after the rate increase, erasing an earlier loss of as much as 2.2 percent.

— With assistance by Rafael Gayol

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