Bank of Mexico

December 15, 2016

Mexican monetary officials just engineered the fifth 50-basis point interest rate hike of 2016. Along with a 25-basis point hike in December 2015, the rate has risen from 3.0% to 5.75% in the space of twelve months, nearly matching the dramatic tightening done by the Fed in 1994-5. The inflation dynamic faced by Mexican officials as they attempt to reestablish the 3% inflation target is straight-forward. From Mexico’s perspectives, President-Elect Trump’s proposed changes in trade and immigration policy are hostile and point to a mix of much weaker growth and and higher inflation for Mexico. During the election campaign, the peso became the eminent barometer for the likelihood of Trump getting elected. The peso has dropped much further since November 8. This is boosting import prices and overall inflation in Mexico. Now the Fed has signaled a steepening upturn  in its interest rates, and Mexican authorities feel compelled to outpace whatever increases the Fed implements.

To counteract the pressures inflationary additional and strengthen the contribution of the
monetary policy to the process of convergence, and taking into account the increase of 25
basis point in the target range for the reference of the United States Federal Reserve rate,
the Governing Council has decided to increase the target for the Mexican interbank interest rate a day
by 50 basis points, to locate it at 5.75 per cent. Looking forward, the Governing Council will continue to
watch the evolution of all the determinants of inflation and expectations of medium and long
term, especially for the potential transfer of variations in the exchange rate to prices. Also it will keep a vigilant monetary position relative between Mexico and United States, without neglecting the development of the output gap. It will continue taking the measures necessary to strengthen the
convergence of the inflation to the target of 3.0 percent, with all flexibility, in the moment
and to the extent that the conditions require such.

Copyright 2016, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

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