Bank of Mexico Tightens Again

March 31, 2017

With the peso trading much better lately, Mexican monetary officials throttled back the size of its incremental hike of the overnight money rate to 25 basis points. However, with inflation still cresting and now above the 2-4% target ┬áin lagged response to the peso’s steep losses prior to U.S. President Trump’s inauguration, further monetary restraint was still deemed necessary according to a released statement. The decision to take this preemptive prudential action was a unanimous one. Officials trust that amid slow growth and following the administration of a whole series of rate hikes, inflation’s spike will not endure, although the short-term risk is that it will go higher before peaking.

Looking forward, officials will not only watch movements in the peso closely but also maintain an eye on Fed policy and the interplay between Mexican growth, which has been positive but low and the trend of potential GDP. Previous 50-basis point rate increases were administered in February, June, September, November and December of 2016 plus February of this year. The first increase of the current tightening cycle late in 2015, like today’s, was 25 basis points in size. The overnight interbank funding rate had been at a record low of 3.0% from October 2014 until December 2015.

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

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