peso risk

Mexico central bankers flag peso risk, possible fed hike

Mexico’s central bank board is worried global financial volatility could spur a deeper slump in the peso, and some of its members think it might need to hike interest rates before the U.S. Federal Reserve, according to the minutes of their last policy meeting.

Policymakers voted 5 to 0 to keep their benchmark rate at 3.75 percent at their May 5 meeting, according to the minutes released on Thursday.

The central bank had surprised markets with a 50 basis point hike in February.

According to the minutes of the last meeting, some board members thought Mexico may need to raise interest rates again independently of any move by the U.S. Federal Reserve to tighten borrowing costs due to the risks to inflation.

The peso has weakened sharply since late 2014, but inflation so far has been surprisingly cool.

One member thought there was enough slack in the economy to raise rates without hitting growth.

Most members thought that annual inflation would end the year around its 3 percent target, but the majority worried about the risk that global volatility could spark a “disorderly” drop in the peso that could have a bigger impact on inflation.

A sharp drop in the peso during February pushed Mexico’s central bank to directly intervene in currency markets for the first time since 2009 and to unexpectedly raise interest rates after an unannounced meeting.

Since the bank’s policy announcement early this month, the peso tumbled again, hitting a fresh three-month low on Thursday.

The speed of the peso’s recent tumble has sparked speculation the central bank could soon intervene to try and cushion the currency’s fall with direct dollar sales.

(Reporting by Michael O’Boyle and Gabriel Stargardter Editing by W Simon)

Puerto Vallarta News

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