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Mexico’s central bank delivered a quarter-point rate rise in line with market expectations, taking its key lending rate to 6.5 per cent to keep up the fight against rising inflation.
“Since the last monetary policy decision, the conditions in national financial markets improved significantly,” Banxico said in its statement, though it acknowledged external uncertainty remained.
The peso rallied in anticipation and was trading around 18.63 just after the announcement.
The bank said its unanimous decision was motivated by a desire to avoid contagion in price formation in the economy, to anchor inflation expectations and take into account the US Federal Reserve’s recent 25 basis point rise.
However, one investor said the motivation may have less to do with inflation and more to do with ensuring the flow of investment capital does not dry up by making rates attractive. “You can deal with inflation later. Liquidity is more complex,” he said.
The bank promised to continue monitoring all variables closely so it could take all necessary measures to bring inflation into line.
Banxico has delivered six half-point increases in just over a year, and the result, according to Luis Arcentales at Morgan Stanley, is that “the peso no longer stands out within the emerging-market space as a cheap ‘proxy hedge’”.
He and Carlos Capistrán at Bank of America Merrill Lynch agree that the hiking cycle is nearing its end. Mr Arcentales said Banxico should “leave the door open for further tightening” because inflation is still tracking upwards, and fresh volatility – sparked, perhaps by the upcoming renegotiation of the North American Free Trade Agreement – cannot be ruled out.
Mexican headline inflation for the year to mid-March was 5.29 per cent, a nearly 8-year high, according to data published last week – beyond the bank’s goal of 3 per cent plus or minus a point. The rate has lurched higher in part because of a New Year’s Day petrol price shock, in which pump prices were increased as much as 20 per cent.
The government has braked fuel price rises since then, but inflation is still expected to continue to edge higher, “which means the central bank is likely to keep its guard up,” said Mr Arcentales.
The median of expectations for year-end is a rate of 7.25 per cent, according to a market survey by Citibanamex published earlier this month.