The Bank of México increased its benchmark interest rate by 25 basis points today to 7.75%, the highest level since December 2008.
The rate hike is the second this year after the central bank, also known as Banxico, raised its key rate by the same margin in February. The decision, taken unanimously by the Banxico board, was widely anticipated by financial markets.
“It is forecast that the economy will continue to transit through a complex panorama, both externally and internally, which makes it particularly important that, in addition to pursuing a prudent and firm monetary policy, measures are adopted that encourage greater productivity and sustainably consolidate public finances,” the bank said in a statement.
In its final monetary policy announcement before the July 1 presidential election, Banxico also said it would not hesitate to make further moves if necessary.
Inflation decreased slightly in May to an annual rate of 4.51% compared to 4.55% in April but Banxico said that some previously identified upside risks have begun to materialize, meaning that the downward trend is likely to slow or stagnate.
“In particular, there has been a greater depreciation of the exchange rate and pressures on the price of gasoline and LP gas associated with increases in their international benchmarks. If these factors persist, the rate of decline in inflation would be affected,” Banxico said.
With regard to the United States’ recent decision to impose tariffs on Mexican steel and aluminum imports, Banxico said it expected that the duties would only have a short-term and limited impact on inflation.
However, if monetary policy was not modified, the tariffs too could contribute to a slowing of convergence towards the inflation target of 3%, the bank said.
Marco Oviedo, chief economist for financial services company Barclays in Mexico, told the newspaper El Financiero that he expected that today’s interest rate increase would be the last adjustment for the year before a downward adjustment is made next year.
Oviedo also said that he expected inflation to remain stable at around 4%, which he noted was above the central bank’s target and therefore would obviously “keep Banxico on the prudent side.”
Benito Berber, a strategist from Japanese financial company Nomura Securities, said that future monetary policy decisions will be heavily dependent on the prevailing exchange rate and inflationary pressures.
The peso has declined 12% against the U.S. dollar during the course of the second quarter of this year but rallied slightly to gain 0.85% this afternoon and is currently trading at around 20.2 to the dollar.
The currency has come under pressure this year due to uncertainty about the future of the North American Free Trade Agreement and the outcome of the July 1 presidential election.
Presidential candidate Andrés Manuel López Obrador has a commanding lead in the polls and according to an analyst from Exotix Capital, it’s likely that the peso has already priced in the “near certainty of an AMLO victory.”
However, Rafael Ellis added that “a period of heightened volatility” for the peso is expected “between AMLO’s likely election victory on 1 July and inauguration day on 1 December, since it will be during that period that investors will get to know AMLO’s likely cabinet.”