Mexico Central Bank Identifies Inflation Risk

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Mexico Central Bank

The board members of Mexico’s central bank are trying to keep inflation under control as additional interest rate increases may be required to control price pressures, according to the minutes from the bank’s last meeting.

The new governor, Alejandro Diaz de Leon, along with the Banco de Mexico board raised its main rate by 25 basis points to 7.25 percent, the highest rate seen almost nine years. The meeting on Dec. 14 maintained the bank’s more hawkish manner under its new leader, with all four members of the board uniting as their main goal is to control inflation now and also in the long term.

“Some (board members) argued that given the current environment, the current monetary policy stance is not congruent with a trajectory for inflation converging to the 3.0 percent goal toward the end of next year,” according to the minutes.

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Previous indications from board members that the bank may have to be more aggressive in their efforts to contain inflation, which reached 6.69 earlier this month.  One board member had suggested a 50 basis-point rate increase during the monetary policy meeting.

“They signaled the inflation outlook has deteriorated and it is likely they will need to raise interest rates again, perhaps as soon as the next meeting, which is scheduled for Feb. 8,” said Gabriela Siller, a bank economist.


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Several board members suppose hitting the 3 percent target will more time than previously anticipated and the majority believe that inflation will approach its target rate by the end of 2018 and sustain its target of 3 percent in 2019, according to the minutes.

The members of the board also added that the peso currency may decrease in value if discussion of the renegotiation the North American Free Trade Agreement (NAFTA) are adverse. U.S. monetary and fiscal policy changes, along with concerns over Mexico’s 2018 presidential election, may also decrease the peso’s value.

This month, the peso fell to nearly 10-month low versus the U.S. dollar on concerns regarding inflation and the impending danger to investments from the U.S. corporate tax cuts.

 

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