Mexico Monetary Policy February 2017

Mexico

Mexico: Banxico hikes interest rate by another 50 basis points

February 9, 2017

Mexico’s Central Bank (Banxico) raised interest rates for a fourth straight meeting in February in response to a sharp weakening of the peso early this year and soaring fuel prices in January that sent inflation spiraling above the Bank’s target. Banxico held its first monetary policy meeting of the year on 9 February and, in a decision in line with Consensus, it hiked the key monetary policy rate by 50 basis points to 6.25%.

The tone of Banxico’s statement was hawkish, showing growing concerns about inflation and the prospect of slower growth due in part to Donald Trump’s threats to renegotiate the North America Free Trade Agreement (NAFTA) and slap a tax on U.S. firms that send jobs south of the border.

The Central Bank also suggested that further interest rate hikes are likely going forward, particularly as inflation and inflation expectations will continue to rise. Commenting on Banxico’s decision, Benito Berber, Senior Latin America Economist at Nomura said:

“Banxico is trying to limit inflation expectations, which have been rising. Although there are risks to growth, the risk that expectations get out of control is more pressing.”

In addition to soaring inflation and inflation expectations, Banxico showed clear concerns about the Fed’s interest rate normalization process, which could be faster than was anticipated late last year. This is mainly due to potentially expansionary fiscal policy in the U.S. Also, the monetary authority signaled that the policy of other central banks in the developed world could become less accommodative than previously expected.

Going forward, Banxico’s movements will depend entirely on the evolution of inflation and exchange rate dynamics. An extremely weak Mexican peso will continue to pose a risk. In spite of recent gains, the peso remains well below the levels seen before the U.S. election and further depreciation of currency against the U.S. dollar is still in the cards.

On average, the view of the panel of analysts surveyed by FocusEconomics is that the target of the overnight interest rate will end 2017 at 7.07%. For 2018, analysts expect the interest rate to drop, on average, to 6.99%.


Author:, Senior Economist

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Mexico Monetary Policy February 2017

Note: Banxico target rate (Tasa objetivo de fondeo bancario) in %.
Source: Mexico Central Bank (Banxico).


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