February 8, 2018 / 6:01 AM / 10 months ago

Mexico cenbank seen hiking rates to contain inflation worries

MEXICO CITY, Feb 8 (Reuters) - Mexico’s central bank is expected to raise interest rates on Thursday to a nine-year high in order to contain worries that inflation may not cool as quickly as forecast.

Banco de Mexico is expected to hike its key rate by 25 basis points to 7.50 percent, the highest since February 2009, according to 17 of 20 analysts polled by Reuters last week. Three predicted the bank would hold steady.

New Governor Alejandro Diaz de Leon led a quarter-point hike in December, when the bank said it would act again, if needed, to contain inflation expectations. An erosion in the outlook since then was expected to drive another hike.

While the central bank has said it expects inflation to ease back toward its 3 percent target by the end of the year, analysts are skeptical.

A central bank poll last week showed analysts raised the annual inflation estimates for 2018 to 4.06 percent, up 21 basis points from the previous poll in mid-December.

That “should leave Banxico no choice but to match market expectations and hike this week,” said Gustavo Rangel, an economist at ING.

Yields on Mexican interest rate swaps are pointing to a 25 basis point hike.

Analysts were divided over whether the central bank would signal a pause in its recent hikes, or if it could suggest that it will match expected increases in borrowing costs by the U.S. Federal Reserve this year.

Data due earlier on Thursday is expected to show the annual inflation rate fell to 5.51 percent in January after hitting a 16-1/2-year peak of 6.77 percent in December, according to a Reuters poll.

The drop could give policymakers room to suggest that they have hiked enough for now, but they could also signal they are concerned about a renewed decline in the peso.

Mexico’s peso firmed in January hitting a more than nine-month low in December, helped by bets that the United States may not pull out of the North American Free Trade Agreement (NAFTA) with Mexico and Canada.

But jitters ahead of this summer’s presidential election in Mexico, as well as renewed concerns about the future of NAFTA, could hit the peso again, analysts warned.

“Even if Banxico tweaks its tone to a less hawkish one, risks will likely remain tilted towards an additional hike if developments on NAFTA talks are not positive,” said Carlos Serrano, an economist at BBVA Bancomer. (Reporting by Michael O’Boyle; Editing by Leslie Adler)

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