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Mexico raises interest rates but calls time on further action

One last rise. That was the message from Mexico’s central bank as it lifted its key lending rate by 25 basis points to 7 per cent and said that should be enough to bring runaway inflation to heel.

The lender has aggressively raised rates by 375 points over the past 16 months to seek to curb a fast depreciating peso that was spooked by the prospect of Donald Trump in the White House, and then fast accelerating inflation, now running at a more than eight-year high. 

But in a communiqué after its latest monetary policy meeting, the board led by governor Agustín Carstens signalled its work was done — at least for now. 

“The board considers that with today’s increase, and taking account of the transitory nature of the shocks that have impacted inflation [and] the information we have at hand now . . . the level reached by the reference rate is consistent with the process of efficient convergence of inflation to the 3 per cent target,” it said. 

The latest rate increase was widely expected in the market, especially after the US Federal Reserve’s rate rise earlier this year, and most analysts had expected the bank would now take its finger off the trigger. Citibanamex called 7 per cent a “terminal” level. Analysts now expect Banxico to break out of step with the Fed.

The Mexican central bank’s mandate is to control inflation and it sets a target range of 3 per cent, plus or minus one point. Data released by the state statistics office earlier on Thursday showed inflation running at 6.3 per cent in the first half of June, more than double the goal. 

Consumer prices surged after the government abruptly ended gasoline subsidies in January and the bank expects it to take most of 2018 for inflation to return to the target range.

As ever, Banxico remained cautious, stressing that “given the risks that remain present, the board will remain vigilant to ensure that a prudent monetary posture is maintained”. Mexico and the US expect to kick off renegotiation of the North American Free-Trade Agreement around mid-August, which is likely to ensure volatility remains. 

With the peso being one of the world’s most liquid currencies, it is also in the line of fire as an emerging market hedge for risk beyond the region, like Britain’s decision to exit the EU. 

The peso breached a historic low of 22 to the dollar in January on President Trump’s Mexico-bashing rhetoric, but has recovered dramatically since then to pre-US election levels, easing pressure on prices of tradeable goods. 

Alberto Ramos at Goldman Sachs said the raising cycle now appeared to be over. “The next move is more likely to be a rate cut than a rate hike,” he said. 

Underscoring Banxico’s confidence that inflation will not get much worse before it gets better, the communiqué noted that one board member voted to keep rates at 6.75 per cent. 

“Policymakers underscored that second-round effects to inflation remain under control, and labour market conditions are no longer a threat to inflation,” Andrés Abadía, senior international economist at Pantheon Macroeconomics, wrote in a note to clients. 

Banxico can breathe a sigh of relief, but Mexico’s economy has shown signs of slowing in recent months as consumer demand, which had been the main engine of growth, eased. However, the bank last month raised its forecast for growth this year to between 1.5 and 2.5 per cent.

A moderation in spending is no bad thing, but that leaves the onus on exports to drive Mexico’s economy going forward, Mr Ramos said. The outlook for manufacturing — the backbone of Mexico’s economy — was “fair”, he said. 

As ever with the Mexican economy, a perennial underperformer stuck in a growth rut of 2 to 2.5 per cent “for ever”, there is “no reason to celebrate, but no reason to despair”, he added.

The rate increase could be the last by Banxico governor Mr Carstens, who leaves at the end of November to head the Bank for International Settlements. No successor has yet been named but one of the main names in the frame is José Antonio Meade, finance minister.