Another Mexican Central Bank Rate Hike

February 9, 2017

The U.S. election put Mexico in a world of hurt. A variety of policy initiatives by the new administration north of the border has weakened the peso sharply, driven Mexican import prices considerably higher and overall inflation above target, and depressed consumer and business confidence. Growth slowed last quarter. According to a released statement after a further 50-basis point rate hike announced by the Bank of Mexico today, the balance of risk continues to deteriorate. Indeed, dangers to Mexico from U.S. policy changes on trade, taxes, and immigration policy are so just threats. The real damage is yet to start. The statement notes that not only has the peso already fallen extensively but also the long- and short-term interest rate differentials between Mexico and the United States are widening.

The statement also stresses the likelihood of a steepening withdrawal of Federal Reserve stimulus that’s likely to amplify pressure on the peso and Mexican interest rates. Today’s 50-basis point increase in Mexico’s central bank interest rate to 6.25% is the first one of 2017. During 2016, there were 50-bp increases done in February, June, September, November and December, and the first move in this sequence was a 25-basis point hike in December 2015. Altogether, the reference rate has more than doubled from a 3.0% starting point.

Copyright 2017, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

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