Mexico’s central bank raised its benchmark interest rate for the third time this year prevent higher inflation and anchor inflation expectations risks to inflation had deteriorated “moderately.”
The Bank of Mexico (Banxico) has now raised its rate by 375 basis points since the U.S. Federal Reserve began normalizing its policy stance in December 2015, by 100 points this year and by 150 points since the election of Donald Trump as U.S. president.
The rate cut came as a surprise to many economists who had expected the central bank to keep its rate steady in light of the rise in the peso. Banxico’s benchmark target for the overnight interbank rate now stands at 6.75 percent.
But the central bank is clearly worried that rising inflation, from past depreciation of the peso, will spark second-round effects on other prices and wages.
Mexico’s headline inflation rate rose to a higher-than-expected 5.82 percent in April from 5.35 percent in March, well above the bank’s midpoint target of 3.0 percent. It was the 10 consecutive month of rising inflation, with prices boosted by higher food and energy prices following a rise in regulated gasoline prices at the start of the year.
Baxico noted that the rise in core inflation to 4.72 percent in April from 4.48 percent due to the impact of past peso depreciation and price adjustments and a non-core inflation rate of 9.25 percent, which reflects both energy prices and higher prices of some agricultural products.
Although inflation expectations remain largely stable, the central bank expects inflation to continue to be affected by higher motor transport rates and some agricultural products as well as the accumulated impact of peso depreciation so it will remain above its range of 2.0 to 4.0 percent.
However, during 2018 inflation is expected to resume its fall toward the 3.0 percent target.
The central bank noted the “significant appreciation” of the peso compared with the beginning of this year and although volatile remains high, it was lower than in the first quarter.
Mexico’s peso began falling in mid-2014, in sync with the fall in crude oil prices, and hit a historic low of almost 22 to the U.S. dollar in mid-January this year. The fall in the peso has pushed up import prices and thus inflation.
But since January the peso has appreciated sharply, supported by Baxico’s rate hikes and expectations that Trump will not impose major tariffs on Mexican exports.
Today the peso was trading at 18.79 to the dollar, up 10.4 percent this year.
Mexico’s economy grew by an annual rate of 2.7 percent in the first quarter of this year, up from 2.4 percent in the fourth quarter of last year, despite weakness in public and private investment form uncertainty over the relationship with the United States, the central bank said.
Mexico raises rate 25 bps as risks to inflation worsen