Mexico's Central Bank Lifts Rates to Nine-Year High -- Update

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02/08/2018 | 10:06 pm


By Juan Montes



MEXICO CITY -- The Bank of Mexico lifted interest rates by a quarter percentage point Thursday to a nine-year high, amid stubbornly high inflation and investor expectations that the U.S. Federal Reserve may raise rates faster than previously thought.



The overnight interest rate target now stands at 7.5%, the highest since February 2009. The move was expected by most economists and follows a similar move in December.



In its policy statement, the central bank left the door open to additional rate increases, saying it "will act in a timely, firm way to keep inflation expectations anchored."



The decision was unanimous. It was the first policy meeting attended by Irene Espinosa, who was appointed last month as the first woman at the bank's five-member board. It was the second meeting for the Bank of Mexico chief Alejandro Díaz de León, who took the governor's post in December.



Some analysts said the newcomers are probably seeking to assure investors of their commitment to fighting inflation.



"We suspect that today's hike was the final move in the tightening cycle, but given recent swings in currency markets it clearly won't take much to persuade policy makers to move again," said Neil Shearing, chief emerging-markets economist at Capital Economics.



Normally, the bank probably would have stayed on hold, "but a combination of Nafta concerns, a new governor trying to burnish his inflation-fighting credentials with markets, and recent swings in the global financial markets all point towards playing it safe," he said, referring to the North American Free Trade Agreement that the U.S., Mexico and Canada are renegotiating.



The peso, which is the second-most-traded emerging-market currency after the Chinese yuan, weakened slightly after the announcement as the quarter-percentage-point rate increase had been widely discounted. The peso traded in Mexico City at 18.9450 to the U.S. dollar Thursday afternoon, already weakened by the decline in global stock markets.



Mexico's annual inflation eased in January to 5.55%, from 6.77% in December, but it is still well above the central bank's 3% target. The central bank thinks inflation will return to the target in the first quarter of 2019, taking longer than previously expected.



The Bank of Mexico has raised interest rates by 4.5 percentage points since December 2015. Higher interest rates, which lead to more expensive credit and less consumption, are one factor behind the economic slowdown that Mexico experienced last year. Economic output expanded 2.1% in 2017, according to preliminary data, the lowest growth in four years.



The big beneficiaries have been banks and savers. Private banks had profits of $7.3 billion last year, a 28% increase from 2016, Mexico's banking regulator recently said.



In the last two years, consumer prices have been hit by several shocks. The peso has depreciated 22% since early 2015 due to falling oil prices -- some 17% of Mexico's government revenue comes from oil -- and uncertainty related to the renegotiation of Nafta. A weak peso makes imports more expensive, affecting end prices.



In early 2017, the government ordered an unprecedented 20% increase in gasoline prices, which in turn pushed up transportation costs.



The Mexican peso has recovered some ground in recent weeks as fears about a possible collapse of Nafta talks dissipated. But recent positive economic data in the U.S. have prompted investors to flee from riskier assets such as the peso, betting the Fed will raise interest rates faster than initially expected.



The Bank of Mexico said Thursday that the peso could face new episodes of volatility in the coming months as uncertainty remains high. It cited Mexico's presidential elections in July; the Fed's policy stance; and the risks that Mexico, the U.S. and Canada ultimately fail to reach a deal on Nafta.



Write to Juan Montes at [email protected]





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