Mexico's Central Bank Lifts Rates to 7% -- Update
June 22 2017 - 4:15PM
Dow Jones News
By Juan Montes
MEXICO CITY -- The Bank of Mexico on Thursday lifted the
overnight interest rate target by a quarter percentage point to 7%,
the highest level since early 2009, and indicated that the
tightening cycle that began in September has ended for now.
It is the seventh consecutive time the central bank raised
interest rates, and the fourth increase so far this year, amid a
continued effort to tame rising inflation. The move was broadly
expected, particularly after the U.S. Federal Reserve raised rates
last week.
In its statement, the central bank made it clear it considers
the current rate level as appropriate. "The reference rate has
reached a level congruent with meeting the 3% inflation target,"
the bank said. One member of the board voted to keep rates
unchanged.
The central bank said the rate increase sought to anchor
inflation expectations and was motivated in part by last week's Fed
move. Mexico's annual inflation hit a fresh eight-year high in
early June at 6.30%.
A recovering peso, which has gained around 20% against the U.S.
dollar since February, gave the central bank some room to signal
the end of the rate-raising cycle. After the policy decision was
announced, the peso slightly appreciated against the U.S.
dollar.
"It appears that policy makers are increasingly of the opinion
that their work is done," said Adam Collins, a Latin America
economist with Capital Economists, a research consultancy.
Still, the central bank said it would remain prudent, as upside
risks to inflation remain. It also said it would be watching the
monetary stance relative to the U.S. Some economists expect the
bank to raise rates again if the Fed does, to keep the peso
attractive for investors.
The Bank of Mexico has raised interest rates by 400 basis points
since December 2015. Inflation started to climb last July as a weak
peso started to affect inflation expectations. Then, in January,
Mexico's government ordered an unprecedented 20% jump in gasoline
prices, which in turn impacted transportation costs.
The bank expects annual inflation to be "considerably" above the
4% during 2017, start slowing down by the end of the year and meet
the 3% target by the fourth quarter of 2018.
Many think the steep increase in borrowing costs, which weighs
on consumption, could dent Mexico's economic growth prospects for
the year. In its policy decision, the central bank said the economy
showed signs of slowing down at the beginning of the second
quarter, due to sluggish private consumption and investment.
In the first quarter, Mexico's economy showed resilience,
expanding at an annualized rate of 2.7%, as exports benefited from
a weak peso early this year that made local products more
competitive abroad. The government sees economic growth at
1.5%-2.5% for this year.
Write to Juan Montes at juan.montes@wsj.com
(END) Dow Jones Newswires
June 22, 2017 16:00 ET (20:00 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.