Mexico's central bank raised its benchmark target for the overnight interbank rate by another 50 basis points to 5.75 percent to counter additional inflationary pressures from the potential transfer to consumer prices from the lower peso and ensure that inflation converges to its target following the U.S. Federal Reserve's rate hike yesterday.
The Bank of Mexico (Banxico), which has now raised its rate by 275 basis points since the Fed's first rate hike last December, added the country is facing an "uncertain" environment due to the economic policies that may be implemented in the U.S. and this may trigger episodes of volatility.
In this context, the central bank said it was especially relevant that authorities strengthen Mexico's macroeconomic fundamentals, maintain fiscal consolidation efforts, implement structural reforms and adjust the monetary policy stance in a timely manner.
Despite a slowdown in industrial production in recent months and stagnant investments, Banxico said there were signs of a revival of the economy in the third quarter as external demand improved while private consumption increased its rate of expansion.
Mexico's Gross Domestic Product expanded by 1.0 percent in the third quarter for annual growth of 2.6 percent, up from 2.3 percent in the second quarter as weakness in industrial output was compensated by an improvement in the services sector.
The central bank said recent changes in the Fed's policy, along with expected changes in U.S. fiscal policy, had led to a significant rise in the U.S. dollar against virtually all currencies, helping mitigate deflationary fears in the euro area and Japan and possibly leading the less accommodative monetary policies going forward.
Mexico's peso has been weakening steadily since November 2014 and accelerated sharply following the election of Donald Trump as U.S. president, who has said he wanted to build a wall between the two countries and renegotiate the North American Free Trade (NAFTA) agreement.
Although the peso fell immediately in response to the Fed's rate increase on Dec. 14, the peso reversed course today following news of Baxico's rate hike and was trading at 20.42 to the U.S. dollar, down from a record low of 20.7 this morning.
But since the start of this year the peso is down almost 16 percent against the dollar.
Mexico's inflation rate rose to 3.31 percent in November from 3.06 percent in October, mainly due to the effect of the peso's depreciation and higher cost of food, housing and transportation.
With gasoline prices slowly being liberalized and an increase in minimum wages in January, the central bank expects inflation to temporarily rise before converging back to its 3.0 percent target in 2018.