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Mexico central bank hikes rates. Hints at an end to policy tightening

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Officials at the Banco de Mexico, the Mexican central bank hiked interest rates on Thursday by 25 basis points as widely expected by economists. This pushed the interest rates to 7% in Mexico.

Policy makers said that the borrowing costs are now high enough to contain any further rise in inflation. This was seen by the markets as a signal that the central bank is probably done with the interest rate hikes for the near term.

Mexico Interest Rate: 7.0%

The majority of policymakers voted on the rate hike in order to anchor the inflation expectations. They also considered the Fed’s policy tightening cycle.

Central bank officials noted that there were downside risks to growth but acknowledged an overall improvement. Inflation risks were said to be neutral based on the current monetary policy.

Mexico Interest Rates: 7.0% (June 2017)
Mexico Interest Rates: 7.0% (June 2017)

Yesterday’s rate hike marks a seventh consecutive rate hike from the Mexican central bank. Interest rates in Mexico stand at the highest levels since early 2009.

Consumer prices at 8-year high

According to the most recent records, consumer prices in Mexico rose to 6.1% in May, accelerating from 5.82% previously. For June, early estimates showed that consumer prices rose 6.3% in the first half of this month, suggesting that inflation was not slowing.

This was the highest inflation rate recorded since April 2009 as inflation accelerated for eleven consecutive months.

In the accompanying statement, Banco de Mexico said, “the reference rate has reached a level that is consistent with the process of efficient convergence of inflation to the 3 percent target.”

Central bank officials to remain vigilant

Officials, however, said that they would remain vigilant of any new developments in the key economic indicators. Mexico is targeting an inflation rate of 3% with a band of plus one or minus one percent.

Following the rate hike decision, the Banco de Mexico Governor, Agustin Carstens said that at the current interest rate, even if the Fed continues with its policy tightening, Mexico would be able to leave its interest rates unchanged.

Calling it “certainly possible,” Carstens said that it would depend on the context noting at the current interest rate, it would lead to a 3% inflation target level at some point in the future. Carstens reiterated that although the rate hike is appropriate, policy makers will continue to be vigilant of any inflationary pressures that might continue to build up.

The central bank raised its growth forecasts for Mexico with GDP expected to be between 1.5% and 2.25% this year.

Central bank experts are, however, not quite convinced that the interest rate hike cycle is done with. Many project that the Mexican central bank could hike interest rates by another 25 basis points by the end of this year.

NAFTA talks to start mid-August

In response to the rate hike, the USDMXN closed lower on the day. The currency pair has been steadily falling since early January this year after rising to record highs above 21.69 following the Trump campaign trail and his election victory. The peso was hit by a lot of uncertainty which included trade ties and the proposed wall that Trump promised to build.

USDMXN was, however, contained and continued a steady decline since January’s swearing in ceremony of President Trump.

The US and Mexico will start the North American Free Trade Agreement (NAFTA) in mid-August. This is likely to bring back some uncertainty to the table with USDMXN likely to turn volatile as a result.

Following yesterday’s central bank decision, some analysts expect that the next policy move from the central bank of Mexico would be a rate cut rather than a rate hike. With the economic projections strong, the current interest rates seem to be appropriate.

However, Mexico will have to rely more on its exports in order to maintain its growth rate, which could potentially hit an obstacle with the NAFTA talks.

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