Bank of Mexico expects inflation to ease slowly to target of 3 pct

The Bank of Mexico hiked its key interest rate yesterday. The interest rate was raised by 25 basis points to 7.25 percent. One member of the central bank even voted in favour of a 50-basis point hike. The hike is because of high inflation. Because of special effects such as increase in energy prices, inflation has accelerated to more than 6 percent in 2017 and has stayed at this high level very stubbornly for a few months now.

Therefore, the Banxico expects inflation to ease more slowly to its target of 3 percent. In its statement, the central bank also mentioned many risks that might result in a weaker peso. The first one amongst these are the NAFTA negotiations but an additional tightening of U.S. monetary policy might also exert pressure.

“We had not seen an urgent need for a rate hike in December and therefore view the step as a precautionary measure. That means that Banxico remains true to its approach of acting too early rather than too late also under its new central bank president Alejandro Diaz de Leon, who has been in office since the beginning of the month”, stated Commerzbank.

The Bank of Mexico hinted that an additional tightening of monetary policy is likely if inflation does not develop as desired. Even if this is good news for the peso against the background of the difficult NAFTA negotiations it is unable to benefit properly. This is not expected to change anytime soon and the peso continues to be stricken, added Commerzbank.

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