Concern a Drop in the Peso Could Cause Inflation

Central Bank board members voted 5-0 at their Oct. 31 meeting to hold the benchmark rate at a record low of 3.0 percent, the minutes said.

The majority of policymakers thought that a recent rise in inflation above the central bank’s 4 percent ceiling would cool to around the bank’s 3 percent target by the middle of next year. But among risks, they singled out the peso.

“The majority pointed to the possibility that new episodes of volatility in financial markets could lead to a even greater depreciation of the exchange rate than seen in the last weeks,” the minutes said.

A weaker peso could drive up inflation via higher import prices.

Mexico’s peso slumped to a 2-1/2 year low early this month amid expectations that higher interest rates in the United States could sap demand for emerging market assets.

Annual inflation in Mexico accelerated to a nine-month high of 4.3 percent in October.

Despite greater global uncertainty, all policymakers pointed to stronger U.S. growth, which should support Mexican exports.

Still, the minutes showed most policymakers thought the pace of economic growth in the third quarter may have slowed compared to the expansion in the second quarter.

Third-quarter growth data is due next Friday.

Analysts expect Mexico’s economy to grow 2.3 percent this year compared to the government’s 2.7 percent forecast.

The majority said that even lower oil prices or a drop in Mexican crude output could hurt the economy while recent social unrest could hit domestic and foreign investment.

Protesters have taken to the streets around the nation in sometimes violent demonstrations over the apparent massacre of 43 students abducted by police seven weeks ago.

Mexico’s central bank is not expected to raise interest rates until the U.S. Federal Reserve lifts borrowing costs, which is forecast for the second half of next year.

Yields on Mexican interest rate swaps point to a 25 basis point hike by July next year. (Additional reporting by David Alire Garcia; Editing by Simon Gardner and Bernadette Baum)

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