November 10, 2017 / 12:31 AM / a year ago

Mexico central bank holds rates, but flags inflation risk

MEXICO CITY (Reuters) - Mexico’s central bank flagged risks to inflation as it held borrowing costs steady on Thursday, saying it was necessary to maintain a prudent monetary policy given multiple risks faced by the economy, including trade with the United States.

In outgoing governor Agustin Carstens’ last rate-setting meeting before he departs after nearly eight years in the job, the bank’s board voted to keep the benchmark interest rate MXCBIR=ECI at 7.00 percent, as expected by a Reuters poll.

The Banco de Mexico has raised rates to their highest level since early 2009 to counter a spike in inflation well above the bank’s 3 percent target. Board members have stressed that it is too soon to cut rates, as consumer price inflation remains high.

“Given all the risks that remain present, the board will remain vigilant to assure that a prudent monetary policy position is maintained,” the bank said in a statement.

The outlook for the economy has been clouded by the ongoing renegotiation of the North American Free Trade Agreement (NAFTA) between the United States, Mexico and Canada.

U.S. President Donald Trump has threatened to dump the accord if he cannot rework it in favor of the United States.

Alejandro Cervantes, an analyst at bank Banorte, said the central bank was “emphatic” in highlighting inflation risks.

“In our view, they really are worried about the impact the uncertainty over the NAFTA renegotiation could have,” he said.

The central bank said it would remain “especially” vigilant to changes in the causes of inflation, and stated:

“The view is that the balance of risks regarding the central bank’s expected trajectory of inflation deteriorated, and has an upwards bias in the horizon in which monetary policy operates.”

Mexico’s annual inflation rate unexpectedly quickened slightly in October, data showed on Thursday.

Potential inflation risks could come from a peso depreciation if NAFTA talks are unfavorable, or market reaction to the normalization of U.S. monetary policy, the bank said.

The bank said it expects inflation will trend downward toward its 3 percent target by the end of 2018, at which point core inflation would be slightly above 3 percent.

The Bank of Mexico noted that growth risks are tilted downward mainly due to that the fact uncertainty caused by the NAFTA renegotiation had depressed investment, which could be contributing to a slowdown in the pace of consumer spending.

Reporting by Gabriel Stargardter and Dave Graham; Additional reporting by Miguel Gutierrez; Editing by Lisa Shumaker and Matthew Lewis

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