Published On: Tue, Jun 28th, 2016

Mexico expected to raise interest rates to counter peso’s slump

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Mexico’s central bank is expected to raise its key lending rate on Thursday June 30 after Britain’s decision to leave the European Union deepened a slump in the peso, analysts polled by Reuters said.

The median expectation of the 21 analysts surveyed was for the Banco de Mexico to raise its benchmark interest rate MXCBIR=ECI by 25 basis points to 4.00 percent.

The central bank is due to announce its decision at 1 p.m. on Thursday.

The peso has shed about 8 percent since the last policy meeting in early May, and it hit a record low on Friday following Britain’s vote to leave the European Union. The peso weakened sharply again on Monday.

In February, a slump in the peso of a similar magnitude pushed policymakers to hike interest rates by 50 basis points and to directly intervene in the foreign exchange market for the first time since 2009.

Economists think policymakers could hike interest rates to prevent peso losses from hurting the outlook for inflation even though the annual pace of consumer price gains is running below the central bank’s 3 percent target and the economy is sluggish.

Mexican central banker Agustin Carstens. (PHOTO: eluniversal.com)

Mexican central banker Agustin Carstens. (PHOTO: eluniversal.com)

Of the 13 analysts who expected a rate hike, eight believed it would be a 25 basis points rise, while five expected a hike of 50 basis points, which would take the rate to 4.25 percent.

Eight of those surveyed believed the bank will leave the rate unchanged.

Among those eight, some believed it was more likely for the country’s currency commission to intervene in the forex market by selling dollars. With inflation still relatively low, they believed only a steeper currency collapse would force the bank into hiking rates.

By the end of 2016, the bank’s benchmark rate would be 4.25 percent, according to the median expectations of those surveyed.

Source: reuters.com

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