Rate Hike Does Little To Bring Relief To The Mexican Peso

Just a week after the peso posted one of the biggest declines against the U.S. dollar, the Mexican central bank came out strongly by hiking interest rates, but it did little to help the peso as the currency continued to post declines.

On Thursday, November 17, the Banco de Mexico raised the key rate by 50 basis points, bringing the benchmark interest rates to 5.25% in a widely expected move.

 

Banco de México Interest rates: 5.25%, Nov 2016

Banco de México said in its statement said, “In the weeks following our last monetary policy decision, the global economic backdrop turned more complex, as a consequence of the electoral process in the United States, among other factors.”

The central bank did not rule out further cuts with the central bank chief, Agustin Carstens saying that rates could be hiked again before the end of 2016, but noted that the central bank does not want to see borrowing costs increase as well.

“You need to apply medicine, but you don’t want to cause an overdose,” the central bank chief said. “What we’re trying to do is reach a balance, which is not easy.”

Some economists were expecting to see a bigger rate hike to the tune of 75 basis points, which is being seen as a reason for the selloff in the peso following the disappointment. The peso closed last week nearly 1 percent lower against the U.S dollar at 20.63.

Forecast for the Mexican peso? It’s anyone’s guess

Analysts remain clueless on the peso’s forecasts. Societe Generale expects the peso to fall further to 23 against the dollar while Barclays expects the peso to remain steady near 21 – 21.50 over the next 12-month period.

While the forecasts for the peso might be divided, many agree that eventually the President-elect, Trump will likely to have the final say. Some political analysts expect Trump to soften his stand on immigration and the Mexican border which could see the peso eventually make up the losses against the U.S dollar. But if Trump pushes on with his agenda, “it will be bad for Mexico. I wouldn’t want to guess where this is going. We don’t own any pesos,” says James Barrineau, co-head of emerging market debt at Schroders in New York.