According to News Agency Reuters, Mexico’s central bank is expected to hold borrowing costs steady on Thursday July 30, but signal that it is ready to follow the U.S. Federal Reserve with an interest rate hike to prop up a slumping peso.
All 24 analysts polled by Reuters expect Banco de Mexico to hold its key rate at 3.0 percent on July 30, thanks to tame inflation and despite a dramatic tumble in the peso to a new record low this month.
But fears of further peso volatility and investor outflows mean analysts are now forecasting a 25 basis point hike on Sept. 21 if the Fed hikes at its meeting earlier that month.
The Fed on Wednesday left the door open for a possible rate hike in September, pointing to a strengthening U.S. economy and job market.
“All the incentives are there to give a hawkish tone to the message and prepare the market for a hike in September,” said Sergio Luna, an economist at Banamex in Mexico City. “This will also help the exchange rate.”
Mexico’s peso has tumbled over 25 percent since July 2014, but has not stoked widespread price pressures yet.
Annual inflation touched a new record low of 2.76 percent in early July, and most of Mexico’s central bankers think inflation will remain below their 3 percent target for the rest of the year because of sluggish growth.
Latin America’s second-largest economy grew at its slowest pace in over a year in the first quarter, undermined by flagging oil revenue and weak U.S. growth.
Analysts polled by the central bank expect growth of just 2.6 percent this year, as low oil prices have dampened hopes for a flood of foreign investment expected on the back of a landmark opening of the oil and gas sector.
Last week, Central Bank Governor Agustin Carstens said there is no space for emerging market countries to support their economies with expansive monetary policies, as rising yields on safer U.S. assets pressure their currencies.
(Reporting by Alexandra Alper and Michael O’Boyle; Editing by Meredith Mazzilli)
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