Mexico: Central bank raises key rate to 7.5% as expected

The Bank of Mexico rose the key interest rate by 25bp to 7.50% as expected. The decision was unanimous. Banxico tightened monetary policy for the second time in-a-row in the second meeting presided by the new governor, Alejandro Diaz de Leon. The rate is now at the highest level since 2009.

The Board was unanimous in the decision. According to Banxico, the balance of risks to growth continues with a downward bias. They noted some improvement compared to the previous meeting. 

The hike took place in order to anchor inflation expectation, on higher inflation levels and expectations about US monetary policy. Today’s Mexican CPI data showed a significant slowdown in the annual rate to 5.55% down from 6.77%, still above the 3% target. According to Bank of Mexico officials, the CPI will reach the target during the first quarter of 2019. 

Regarding NAFTA negotiations, the Board considered that an unfavorable evolution could present a risk to the inflation outlook. 

In the statement, the Central bank reiterated that will be vigilant on inflation trajectory, also on the potential pass through on peso, the relative monetary policy stance with US and the output gap, as usual. 

The Mexican peso remained steady after the decision. Against the US dollar, the peso fell earlier today to the lowest level in four weeks. The greenback (USD/MXN) move closer to the key 19.00 area.