Bank of Mexico Leaves Rates Unchanged, Warns of Inflation Risk

The Bank of Mexico left interest rates unchanged Thursday in a split decision, warning that inflation risks remain that could prompt it to tighten monetary policy in the future.

The central bank decided to keep the overnight interest-rate target at 7.75% by a majority, with one board member voting for a quarter-percentage-point increase to 8%.

The decision to stand pat came after Mexico, the U.S. and Canada reached an agreement at the weekend on a new trilateral trade pact to replace the North American Free Trade Agreement, removing a source of uncertainty for local markets and for the future of relations with Mexico’s biggest trade partner. It also followed last week’s interest-rate increase by the U.S. Federal Reserve.

The agreement reduces uncertainty over Mexico’s trade relations with the U.S. and Canada, and its ratification could have a positive impact on markets and the Mexican peso, the central bank said. But it added that the economy still faces a complex environment, including the risk of tighter external financial conditions, and that the outlook for growth maintains a downward bias.

Banco Santander had dropped its call for an interest-rate increase this week after the trade deal was announced, saying it “reduces the risks for the Mexican economy that resulted from trade tensions with the U.S. for at least the past two years.”

The Bank of Mexico said inflation, which held steady in early September around 4.9% after accelerating over the summer on higher energy costs, still faces upside risks from further fuel price pressures.

The bank said it will “take the necessary actions, specifically, maintaining or possibly strengthening the current monetary policy stance, ” to bring inflation back to its 3% target. The bank currently expects that will happen in the first half of 2020.

The statement was “surprisingly hawkish, considering the recent announcement of a trilateral trade deal with the U.S. and Canada,” Capital Economics said in a note. “We still expect rate cuts to come, but these are not on the table just yet.”

Write to Anthony Harrup at [email protected]