Mexican central banks hikes policy rate to 8% as concerns induced by new administration weigh on the peso

Yesterday evening, the central bank of Mexico (Banxico) hiked its key policy rate by 25 bps to 8.00%, mentioning a significant deterioration in the balance of risks for inflation. The policy rate is now only 25 bps below the peak reached during the Global Financial Crisis.

Highlights:

  • Yesterday evening, the central bank of Mexico (Banxico) hiked its key policy rate by 25 bps to 8.00%, mentioning a significant deterioration in the balance of risks for inflation. The policy rate is now only 25 bps below the peak reached during the Global Financial Crisis.
  • Banxico’s policy statement explicitly mentioned the cancellation of the New Mexico City International Airport project and market concerns over the policy agenda of the incoming administration as key drivers for higher risk premiums and the weakening of the peso.
  • Such an explicit criticism has been perceived positively as it reinforces the view of a strong independence of Banxico. On the other hand, however, it also unveils the high degree of uncertainty around the new administration led by president López Obrador (AMLO).
  • Banxico is likely to remain very vigilant in the short term. Markets are already pricing in a further 25 bps hike in December.
  • Looking into 2019, Banxico should remain on hold in H1, before embarking on a gradual easing cycle staring in H2. That said, a review of the equilibria within Banxico’s Governing Board will soon be needed as President AMLO will have to appoint two voting members (out of 6) before end-2018.

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MEXICAN CENTRAL BANKS HIKES POLICY RATE TO 8% AS CONCERNS INDUCED BY NEW ADMINISTRATION WEIGH ON THE PESO

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