Bank of Mexico Raises Rates for Sixth Consecutive Time -- Update

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05/18/2017 | 08:01 pm


By Juan Montes



MEXICO CITY -- The Bank of Mexico lifted interest rates by a quarter percentage point Thursday, a further indication that the central bank is worried about rising inflation that hit an eight-year high last month.



The overnight interest-rate target now stands at 6.75%, the highest since March 2009. The central bank has raised the rate six meetings in a row since September.



Many economists were expecting the bank to stand pat on rates as the recent increases have already helped to stabilize the peso, while the protectionist rhetoric of U.S. President Donald Trump still looms over the country's growth outlook. Some fear higher borrowing costs could hamper steady economic growth so far this year.



But in recent weeks, consumer prices have risen more than expected, hitting an annual rate of 5.8% in April -- the highest since May 2009 after a big increase in gasoline prices early this year.



The central bank, whose only mandate is controlling inflation, signaled that action was needed to keep inflation expectations in check.



"The main challenge ahead for the bank's board is to avoid any secondary effects on prices, keeping inflation expectations anchored in the mid and long term," the bank said in its statement, referring to a broader impact that higher gasoline prices and the depreciation of the peso over the past year could have on prices.



The central bank, which voted unanimously to raise the rate, sounded cautious about the recent calm in financial markets that has allowed the peso to appreciate, saying external uncertainty continues.



The peso has recovered around 17% against the U.S. dollar since hitting a record-low level in late January, as investors have been more confident that a renegotiation of the North American Free Trade Agreement could benefit both the U.S. and Mexico. But observers don't rule out episodes of tension between the two countries in coming months. The Trump administration notified Congress on Thursday that it intends to renegotiate the deal, and formal talks are expected to begin as early as August.



The central bank said it is closely watching the monetary stance relative to the U.S., where the Federal Reserve raised rates in March but left them unchanged early this month.



Since September, the Bank of Mexico has raised rates by 2.5 percentage points, widening the spread between local and U.S. yields in an effort to make the peso more attractive for investors and avoid a persistently weak currency from making imports more expensive.



The Bank of Mexico is expected to raise rates again if the Fed does. Before Thursday's rate move, the consensus among economists was that the overnight interest rate target would end the year at 7%. That benefits local banks, which posted record profits during the first quarter of the year, but makes financing more expensive for consumers and the Mexican government.



The central bank said inflation is expected to be "considerably" above its 2% to 4% target band during 2017. The average 20% increase in gasoline prices at the start of the year has pushed up public transport fares. Analysts expect annual inflation to end the year at 5.6%.



So far, economic growth seems not to have been affected by the interest-rate increases, as Mexico's exports benefited from a weak peso that makes local products more competitive abroad. Mexico's economy has shown resilience, expanding at an annualized rate of 2.4% in the first quarter, according to preliminary estimates.



But the central bank said private investments have been affected by the uncertainty over trade relations between Mexico and the U.S., clouding the growth outlook for the year.



Write to Juan Montes at [email protected]





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