Friday, March 18, 2016

Mexico holds rate as February hike changed peso trend

    Mexico's central bank left its benchmark target for the interbank overnight rate steady at 3.75 percent, as expected, noting the combination of last month's surprise rate hike and the government's move to cut spending had broken the negative trend in the peso's exchange rate and flattened the yield curve, as the bank had aimed for.
    The Bank of Mexico, which raised its policy rate by 50 basis points on February 17 at an extraordinary board meeting, added that authorities' message that the peso would be anchored by healthy economic fundamentals had led to an appreciation of the peso and higher stock prices amid an environment of lower volatility in international financial markets.
    Nevertheless, the central bank said volatility could return to financial markets and the market for oil remains characterized by significant structural imbalance between supply and demand so it will remain "very vigilant" regarding the macroeconomic fundamentals of the country.
    The peso started depreciating in mid-2014 and lost 14.5 percent against the U.S. dollar last year, and continued to decline at the start of this year. But since the rate hike last month, and the government's plan to slash spending in response to lower revenue from oil, the peso has rebounded and is practically unchanged since the start of this year.
    It was trading at 17.4 to the dollar today, up almost 10 percent since a low on Feb. 11.
    Mexico's inflation rate rose to 2.87 percent in February from January's 2.61 percent and the central bank said it expects inflation to top 3.0 percent this year but then end the year around its target.
    The central bank targets inflation of 3.0 percent, plus/minus 1 percentage point.
    In its latest quarterly inflation report, the central bank lowered its growth forecast for this year to between 2 and 3 percent from its previous forecast of 2.5 to 3.5 percent.
    For 2017 the central bank expects growth of 2.5 to 3.5 percent, down from its earlier forecast of 3-4 percent.


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