Mexico Leaves Rate on Hold as Inflation Slows to Near Range

(Bloomberg) -- Mexico kept its benchmark interest rate unchanged at the highest level since 2009, saying that while keeping a slumping currency from affecting prices remains its top priority, the slowdown in inflation this year is consistent with reaching its target.

The central bank, led by Alejandro Diaz de Leon, unanimously voted to leave the rate at 7.5 percent for a second consecutive meeting Thursday, as forecast by 19 of 22 economists surveyed by Bloomberg. Three analysts expected a quarter-point hike.

Mexico’s annual inflation rate in April fell to the lowest level since December 2016, approaching the 4 percent upper end of the central bank target range, after the impact of gasoline price increases abated. While the peso tumbled after polls showed leftist presidential candidate Andres Manuel Lopez Obrador cementing his lead ahead of Mexico’s July 1 election, traders expect it to recover most of that loss this year.

"Despite the favorable inflation dynamics, the decision to hold and preserve a hawkish, conservative stance is warranted by the risks and uncertainty" from the election, Nafta negotiations, the Fed’s stance and emerging-market volatility, said Alberto Ramos, the head of Latin America research at Goldman Sachs Group Inc. in New York.

Mexico Leaves Rate on Hold as Inflation Slows to Near Range

The peso has slumped more than 8 percent in the past month, reaching a one-year low near 20 per dollar. While that’s the worst performance of any major currency after Argentina, the Turkish lira and Brazilian real have fallen almost as much. In the statement accompanying its decision, Banxico said that the factors behind the peso’s weakness are both global and domestic.

The peso maintained its loss after the central bank’s decision on Thursday, falling 0.7 percent to 19.7184 per dollar.

Lopez Obrador has unsettled investors and spurred the peso’s sell-off with proposals that include delaying parts of the nation’s oil-industry opening that has attracted tens of billions of dollars in foreign investment and canceling the construction of a new airport in Mexico City. The decline has also been fanned by concerns that the U.S., Canada and Mexico won’t reach a deal to keep the U.S. in the North American Free Trade Agreement.

Banxico indicated today that the potential inflation effects from a weaker currency would be its top priority, with relative monetary conditions between Mexico and the U.S. in second place and the degree of slack in the Mexican economy in third. Risks to growth remain biased to the downside, while those for inflation are to the upside, the central bank said.

Mexico’s consumer prices fell more than expected in April, sending the annual inflation rate to 4.55 percent, the lowest level in more than a year. The central bank board expects inflation to slow to near its 3 percent goal in the first quarter of next year.

The central bank has lifted Mexico’s interest rate 4.5 percentage points since the end of 2015, and the real interest rate is now almost 3 percent, near the highest level since Banco de Mexico started targeting the overnight rate in 2008.

Banco de Mexico will probably raise the key rate a quarter point at its next decision on June 21, matching a borrowing-cost increase expected from the Federal Reserve, said Gabriel Casillas, the head of research in Mexico City at Grupo Financiero Banorte SAB. Traders see 70 percent odds that the Fed will raise by a quarter point in its June 13 decision.

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