Mexico central bank hikes interest rate, hints it's done

MEXICO CITY (Reuters) - Mexico’s central bank board made a divided decision to raise interest rates on Thursday and policymakers suggested that they may have raised borrowing costs enough to contain a spike in inflation.

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Banco de Mexico raised its benchmark rate MXCBIR=ECI by a quarter percentage point to 7.00 percent, as expected by all 17 analysts surveyed by Reuters last week. One member voted to hold rates, the bank said in a statement.

The central bank has now raised its main interest rate in the last seven meetings. The rate has reached the highest level since early 2009, with inflation at more than an eight-year high.

Policymakers said in their statement that with Thursday’s hike “the reference rate has reached a level that is consistent with the process of efficient convergence of inflation to the 3 percent target,” though they said they would be vigilant.

“I think they are saying they are done with the hikes,” said Benito Berber, an analyst at Nomura in New York. “That is very clear.”

Even if the U.S. Federal Reserve were to hike interest rates later this year, as many in the market expect, Banco de Mexico might be able to leave its benchmark rate on hold, governor Agustin Carstens said in an interview with U.S. news agency Bloomberg.

“Certainly it is possible, it depends on the context,” Carstens said. “We believe that where we are now will lead us to the 3 percent (inflation target) level at some point. We are ready to make the statement that up to today we think it is sufficient but we will be very vigilant.”

Yields on short-term interest rate swaps MXNIRS fell sharply after the decision as investors cut bets on any more interest rate hikes. In a poll from last week, analysts had projected one more rate hike before the end of the year, taking it to 7.25 percent.

The board said the majority of members voted to hike in order to anchor inflation expectations and also to take into account last week’s move by the Fed to hike borrowing costs.

Analysts expected Mexico would match the Fed’s quarter-point rate hike last week in a bid to maintain the appeal of peso-denominated debt to yield-hungry investors.

Policymakers said in their statement the risks to growth were tilted downwards, but had improved on the margin. They said the risks to inflation were neutral given “the current stance of monetary policy.”

Data earlier on Thursday showed that the annual inflation rate in early June rose more than expected to 6.30 percent, its highest since January 2009. But policymakers said in their statement that the inflation rate would peak in the coming months.

The inflation rate has risen because of weakness in the peso, but the currency has rallied back from a record low it hit in January as U.S. President Donald Trump backed away from threats to impose big tariffs on imports from Mexico.

Reporting by Michael O’Boyle and Dave Graham; Editing by Lisa Shumaker, Chizu Nomiyama & Shri Navaratnam