Mexico's Central Bank Raises Rates as Inflation Concerns Mount -- Update
December 14 2017 - 4:20PM
Dow Jones News
By Juan Montes
MEXICO CITY -- The Bank of Mexico raised interest rates by a
quarter percentage point Thursday after a six-month pause, as
policy makers have grown increasingly worried about high
inflation.
The overnight interest rate target now stands at 7.25% -- the
highest since February 2009.
The policy meeting marked Alejandro Díaz de León's first as the
central bank's governor. He took over two weeks ago facing a tough
situation, with high inflation, slowing economic growth, and a weak
and volatile peso.
Some analysts said Mr. Díaz de León may have sought to burnish
the bank's orthodox credentials at his first meeting as
governor.
"The main challenge for the bank's board...is to reinforce the
downward path for inflation to the target," the policy statement
said. A majority of the bank's four voting members agreed to the
move, while one member called for a half-percentage point increase,
underscoring the concern inflation is causing for the board.
The peso -- the second most traded emerging-market currency with
daily average turnover of some $112 billion -- appreciated 0.3%
just after the policy announcement, briefly hitting 18.97 to the
U.S. dollar before moving back above 19.
The rate decision was increasingly expected by markets and
analysts in recent weeks as annual inflation came in above
expectations in November at 6.6%, more than double the bank's 3%
target.
The Bank of Mexico had been expecting inflation to start slowing
at the end of the year, but now sees it ending December above the
November level.
In its policy statement, the central bank said the outlook for
inflation has turned "more complex" and that it will take longer
for prices to return to the target. The bank now sees inflation
"moderately" above 3% during the next two years.
The rate increase is probably the last in the cycle, said Neil
Shearing, the chief emerging markets economist at Capital
Economics. "But it's clear that policy makers won't require much
persuading to tighten again, particularly if the peso comes under
renewed pressure."
The U.S. Federal Reserve's rate increase this week also left
Mexico's central bank little maneuvering room. The bank said the
peso has been pressured since the third quarter by expectations of
Fed rate increases and uncertainty over the renegotiation of the
North American Free Trade Agreement with the U.S. and Canada.
Higher borrowing costs mean less money available for consumers,
which in turn puts downward pressure on prices. Many observers fear
that also will be a drag on an already sluggish Mexican economy
that contracted 0.3% during the third quarter after a string of
natural disasters hit Mexico.
The growth outlook looks gloomy, the bank indicated, as the
often contentious Nafta talks have hit investment "considerably"
and are likely behind the slowdown in private consumption in the
second half of the year.
Inflation was below the central bank's target until late last
year. The uptick this year is mainly explained by the average 20%
increase in gasoline prices ordered by the government at the
beginning of the year as the country liberalizes energy markets,
and peso depreciation that has made imports more expensive.
Until early this month, most analysts expected the Bank of
Mexico to stand pat on rates in the near term after the central
bank called a pause in a tightening cycle that increased the
overnight rate to 7% from 3% between December 2015 and June
2017.
Write to Juan Montes at juan.montes@wsj.com
(END) Dow Jones Newswires
December 14, 2017 16:05 ET (21:05 GMT)
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