Mexico Lifts Rate for 7th Straight Time, Signals End of Cycle

Updated on
  • Decision matches estimate of 26 of 27 economists surveyed
  • Banxico says new rate consistent with CPI converging to target

Carstens Says Mexico Rate Pause May Last Through Fed Hike

Mexico’s central bank raised borrowing costs for a seventh straight time, saying the new interest rate level is consistent with "efficient convergence" of inflation toward target.

Led by Governor Agustin Carstens, Banco de Mexico increased its key rate 25 basis points to 7 percent, in line with the estimate of 26 of 27 economists surveyed by Bloomberg. One economist expected a pause. One of the policy makers on the central bank board voted to keep rates on hold, according to the statement accompanying the decision.

The most hawkish central bank in the Group of 20 nations extended its hiking cycle amid price shocks on items from gasoline to farm products and after the U.S. Federal Reserve raised interest rates. Carstens has said inflation will dip substantially in the second half of 2017, and the peso’s strength will help it reach the target next year. The comments along with Thursday’s accompanying statement are leading some economists to forecast that Mexico’s rate hikes have drawn to a close.

"The level reached in the reference rate is congruent with the process of efficient convergence of inflation toward the 3 percent objective," the central bank said in a statement.

"They’re saying the hiking cycle is over," said Benito Berber, senior economist for Latin America at Nomura Holdings Inc. "For the standards of Banxico, this is as close as you get to a signaling saying ‘This is done.’ Which is pretty interesting."

The peso extended its gain, climbing 1 percent to 18.0507 per dollar in afternoon trading in New York.

Finance Minister Jose Antonio Meade said on Wednesday Mexico is probably near the end of its cycle of interest-rate hikes and may be able to lower borrowing costs as early as year-end.

Investors are “starting to predict that the interest rate could start coming down as early as the end of this year or at the beginning of next, and I think they’re right," Meade told Bloomberg TV at the National Palace in Mexico City.

Mexico Finance Minister Jose Antonio Meade on rate hikes, peso and Nafta.

(Source: Bloomberg)

That’s not to say inflation is under control yet. The annual inflation rate will reach 5.9 percent by the end of the year, according to analysts in the latest Citibanamex survey, up from January’s forecast of 4.7 percent. According to the poll published Tuesday, consumer prices next year will rise 3.8 percent, while Carstens has said they would be at the target by then.

The peso has been the best performing major currency this year amid diminished concern that U.S. President Donald Trump will slap protectionist measures on Mexico. The peso’s implied volatility has also dropped extensively, although the presidential election in July 2018 could cause the currency to fluctuate once again, according to Capistran.

Despite the seven consecutive rate increases, the economy picked up in the first quarter as the service sector has proven resilient. Analysts surveyed by Bloomberg now see only a mild slowdown in 2017, forecasting 2 percent growth in gross domestic product, compared with 2.3 percent last year.

— With assistance by Rafael Gayol, and Lorenzo Nalin

(Updates with analyst quote in fourth paragraph.)
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