Mexico’s interest rates hold steady despite peso slump

MEXICO CITY — Mexico’s central bank held borrowing costs steady on Thursday Feb. 4, but said it would monitor increasing risks to inflation from a deep slump in the peso even as it noted the outlook for growth had worsened, Reuters reported.

The Banco de Mexico left its key rate at 3.25 percent, as expected by all 15 analysts surveyed by Reuters last week.

The analysts anticipated that Mexico’s central bank would hold borrowing costs steady on Thursday after inflation expectations improved despite a deep slump in the peso last month.

The Banco de Mexico hiked its key rate in December for the first time in seven years from a record low of 3 percent, hoping to support the peso after a rate increase by the U.S. Federal Reserve threatened to sap demand for emerging market assets.

The Mexican central bank decision comes after the U.S. Federal Reserve kept borrowing costs unchanged last week. Mexican policymakers suggested they would closely follow the moves of the Fed.

Mexico’s currency has hit a series of record lows against the dollar but that has not yet stoked inflation, which is near its lowest level on record.

The annual inflation rate rose in early January from a record low to 2.48 percent, but remains well below the central bank’s 3 percent target.

The peso has tumbled more than 6 percent since the last Mexican policy meeting on Dec. 17, but analysts do not expect a big impact on inflation any time soon. A central bank poll this week showed median inflation expectations for the end of 2016 fell to 3.10 percent versus 3.38 percent seen in December.

Last year, after a sharp drop in the peso, policymakers suggested they could move before the Fed if currency losses began to threaten inflation expectations.

According to the Reuters poll, the median expectation of analysts is for the central bank to hike interest rates to 3.50 percent in the second quarter and to 3.75 percent by the end of the year.

Source: reuters.com