June 21, 2018 / 5:19 AM / in 5 months

Mexico hikes rates to avoid inflation risks from peso slump

MEXICO CITY (Reuters) - Mexico’s central bank on Thursday raised its benchmark interest rate 25 basis points to 7.75 percent, in a bid to counteract the effects of a peso slump and keep a downward inflation trend on track.

FILE PHOTO: Mexican 5 Pesos Hidalgo silver coins are displayed at currency exchange shop in Ciudad Juarez, Mexico January 15, 2018. REUTERS/Jose Luis Gonzalez

In a unanimous decision by its board, the bank, as expected, raised the rate to its highest level in more than nine years, following a weakening of the peso and U.S. Federal Reserve hike.

In its final monetary policy announcement before Mexico’s July 1 presidential election, the Banco de Mexico said in its statement that it would not hesitate to make further moves if necessary.

“In the presence and possible persistence of factors that ... involve risks to both inflation and inflation expectations, monetary policy will be adjusted in a timely and robust manner to attain the convergence of inflation to its 3 percent target,” it said.

The bank said it raised borrowing costs because “some inflationary risks have started to materialize and ... the balance of risks for inflation has worsened.”

The peso MXN=D2MXN=, which has fallen around 12 percent since mid-April on the back of a broad dollar rally, rose to a session high after the central bank's announcement, extending gains against the greenback.

The peso has also suffered due to deadlock in talks between Mexico, the United States and Canada to rework the North American Free Trade Agreement (NAFTA), and nervousness ahead of the election, which leftist Andres Manuel Lopez Obrador looks increasingly likely to win.

Sixteen of 22 analysts surveyed by Reuters expected the bank to raise the rate MXCBIR=ECI to 7.75 percent. Six analysts had predicted a 50 basis point hike to 8.0 percent, while four forecast it would maintain rates at 7.50 percent.

Annual Mexican inflation eased in May to a 17-month low of 4.51 percent.

The Fed raised its reference rate last week and projected a faster pace of hikes in coming months, with two more this year.

Additional reporting by Michael O'Boyle; Editing by Cynthia Osterman

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