Mexican interest rates expected to rise in wake of U.S. Federal Reserve hike

Federal Reserve Building (Google)

MEXICO CITY — Financial analysts predicted Thursday Dec. 17 that the Central Bank of Mexico (Banxico) would follow the U.S. Federal Reserve and raise interest rates.

A TD Securities analyst predicted a 25 basis point Mexican interest rate hike, following the lead of the U.S. central bank, which on Wednesday Dec. 16 raised U.S. interest rates for the first time in a decade.

“There is obviously also the question as to just how much Banxico will keep itself tethered to the Federal Reserve through the duration of 2016, with the key policy concern being the trajectory of the peso in the wake of the outset of Fed policy normalization, and any vulnerability to domestic price instability emanating from potential peso depreciation,” said the TD Securities analyst, who spoke anonymously to

In a recent interview with Reuters, Agustín Carstens indicated the rate hike would follow the Fed’s lead. Carstens leads the Bank of Mexico’s five-man board, which is expected to raise its benchmark interest rate from 3 percent.

Policymakers in Mexico, Latin America’s No. 2 economy, are expected to hike, even though inflation in Mexico is at a record low, in order to prevent a stampede for the exits by foreign investors, who could dump peso bonds for U.S. Treasuries as yields rise.

In an interview with Reuters, Carstens explained his recent statement that Mexico’s response will not be “automatic” to any move by the Fed. “What we want to say is that the actions of the Fed are not going to be the only thing that determines monetary policy going forward for the Bank of Mexico,” Carstens said, speaking in a wood-paneled salon in the central bank’s office.

Carstens said policymakers were also watching inflation, which cooled to a record low of 2.27 percent in early November, as well as sluggish growth that is not seen fueling demand-side price pressures for some time.

Federal Reserve Building (Google)
Federal Reserve Building (Google)

“We are facing opposing forces,” Carstens said. On one side inflation expectations are well anchored, but the peso’s deep losses could still “ultimately have some impact on prices, especially for tradable goods,” he added. He said the pass through to inflation from the weak peso had been “slow” so far.

However, he said the central bank needed to be ready to “take care” of Mexico’s currency.”The bank of Mexico, at some point, has to send a signal that it is worried about the value of its currency. Because this also affects the will of people to hold assets in the national currency,” Carstens said.

Even as other emerging markets have seen outflows this year, foreign holdings of about 2.05 trillion Mexican pesos ($121 billion) have held relatively steady, near record highs. Some fund managers are skeptical that one U.S. rate hike could trigger big flows out of Mexico and they are concerned that higher interest rates could hurt its economy.

“The Mexican economy is one of the strongest in emerging markets,” said Andrew Stanners, a fund manager at Aberdeen Asset Management in London. “We are not at a point where fixed-income investors are going to walk.”

Still, 20 of 22 economists in a recent poll by Banamex on Monday expect the Bank of Mexico to raise its rate by 25 basis points on Dec. 17, the day after the Fed’s own rate announcement.

Mexico’s peso has hit successive all time lows this year and is down nearly 13 percent against the dollar year-to-date. The peso fell to a more than two-month low on Monday Dec. 7 as crude oil prices hovered near 7-year lows. Mexico is a major crude producer and exporter to the United States. The peso’s tumble triggered the central bank to sell $400 million to support the currency.