Mexico central bank seen holding rates with eye on weak peso

MEXICO CITY, Jan 29: Mexico’s central bank is expected to hold interest rates steady at a record low on Thursday as it balances a drop in inflation against a sharp slump in the peso that could fan consumer prices higher.   Nineteen of 20 analysts polled by Reuters expect the Banco de Mexico to hold its benchmark rate at 3 percent in its first policy decision statement at 1 p.m. local time (1900 GMT) on Thursday instead of the previous release time on Friday morning.

Annual inflation slowed sharply in early January to just above 3 percent after running above the central bank’s 4 percent ceiling for acceptable price gains last year.   The drop in inflation, combined with slack Mexican growth data this week and a flood of liquidity from the European Central Bank last week, pushed economists at Capital Economics to expect a 25 basis point cut this Thursday.   ‘It is worth noting that previous rate cuts in Mexico have come as a surprise and that could be the case again this month,’ economist David Rees wrote in a report on Wednesday. Last week, he had expected Mexico to hold rates steady this week.

However, Mexico’s peso slumped nearly 12 percent in the fourth quarter to its weakest against the dollar in nearly 6 years. While it has recovered slightly, the sharp drop could push vendors to raise prices this year.   ‘We caution that the foreign exchange pass-through will gain importance in the coming months,’ wrote Nomura economist Benito Berber, who said a surprise cut would hurt the peso and increase the risk to inflation.   Policymakers held borrowing costs steady last month and flagged risks to consumer prices from the peso, which suffered as global oil prices tumbled.   Mexican central bank governor Agustin Carstens said earlier this month that Mexico will probably have to raise interest rates this year, given the Federal Reserve’s own expected hike in U.S. borrowing costs.   The Fed on Wednesday said the U.S. economy was expanding ‘at a solid pace’ with strong job gains in a signal that the central bank remains on track with its plans to raise interest rates this year.

Analysts polled by Reuters expect an initial 25 basis point hike in Mexico during the third quarter, with further increases taking borrowing costs up to 4.5 percent by the third quarter of 2016.



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