Banxico, the Mexican central bank, at its monetary policy meeting yesterday hiked the benchmark interest rates 50 basis points to 6.25% in a widely expected move. The decision to hike interest rates comes amid a modest recovery in the nation’s currency which has been repeatedly battered against a stronger US dollar, largely on account of protectionist comments from President Trump.
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Mexico Interest Rates: 6.25% (50bps rate hike, 09/02/2017)
The rate hike decision yesterday is the third consecutive rate hike since the November election results as the central bank has been trying to contain the Mexican peso’s weakness. The central bank first hiked rates by 50 bps in November followed by another 50 bps rate hike in December. Both the decisions failed to make any major impact of the Mexican peso.
This eventually led the central bank to start intervening in the currency markets by selling nearly $1 billion in the spot markets and was the first in nearly a year after the central bank had intervened in February 2016 selling $2 billion in the spot markets to support the peso. USDMXN jumped to an all-time high of above 22 MXN just before the inauguration of President Trump. The Mexican central bank has raised interest rates five times in 2016 by a total 250 basis points in a bid to tackle the exchange rate’s slump.
The interest rate hike yesterday was a widely expected decision, and the Mexican peso did not react much, although the currency maintained gains against the US dollar. Banxico’s governor Agustin Carstens had previously warned on the temporary spike in inflation in January, following the proposed 14% oil price hike. But he cautioned that officials should not overreact to the increase noting that most of these effects on account of the oil price hike would be only temporary.
Mexico inflation shoots higher to an 18-year high
In January, data showed that the annual inflation rate in Mexico accelerated to an 18-year high, more than expected. The headline inflation increased on higher gasoline prices alongside the weaker exchange rate and accelerated at a pace more than what economists had forecast.
