Mexico raises rate another 25 bps in wake of Fed hike

    Mexico's central bank raised its benchmark target for the overnight interbank rate by another 25 basis points to 6.50 percent to anchor inflation expectations and ensure inflation converges toward its 3.0 percent target while taking into account higher U.S. interest rates.
     The Bank of Mexico (Banxico) has now raised its rate by 350 basis points since the U.S. Federal Reserve began its tightening cycle in December 2015, by 125 points since the November 2016 election of Donald Trump as U.S. President and by 75 points this year.
     It is Baxico's seventh rate hike since December 2015 but only the second time the rate has been raised by 25 basis points, with all other rate hikes amounting to 50 points. The only other time the rate was raised by 25 points was in December 2015.
     The decision to raise the rate by the central bank's board was unanimous and expected by financial markets following the Federal Reserve's most recent rate hike on March 15.
     Going forward, the central bank said it would closely following the factors affecting inflation and inflation expectations, how changes to the exchange rate may affect inflation, the relative monetary position between the U.S. and Mexico, and the output gap.
     Mexico's peso began falling in mid-2014, in sync with the fall in crude oil prices, and hit a historic low of almost 22 to the U.S. dollar in mid-January. 
    But since then the peso has appreciated sharply, supported by Baxico's rate hikes and less pessimism about the prospects for trade between the U.S. and Mexico, and was trading at 18.7 to the dollar today, up almost 11 percent this year.
     Last year's depreciation of the peso and higher energy costs have pushed up Mexico's inflation rate but the central bank said investors expect this rise to be temporary with long-term inflation expectations around 3.5 percent.
     Mexico's inflation rate rose to 4.86 percent in February from 4.72 percent in January and the central bank expects it to remain the upper limit of its target range of 2-4 percent during this year but then decelerate and by close to 3 percent by the end of 2018 as the effects of shocks fade.
     However, the central bank also this forecast is subject to many risks, including second-order effects on inflation from higher energy prices and depreciation of the peso that feeds into inflation expectations. 
    Mexico's economy continued to expand in early 2017, the bank said, pointing to external demand and private consumption, although there were some signs this was slowing.
    Mexico's Gross Domestic Product grew by an annual rate of 2.4 percent in the fourth quarter of last year while economic activity grew by an annual 3 percent in January after a 2.1 percent rise in December.

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