Mexico’s central bank maintained its benchmark at 7.0 percent, as widely expected, saying uncertainty from the renegotiation of North American Free Trade Agreement (NAFTA) poses an upside risk to inflation and a downside risk to economic growth.
But the Bank of Mexico (Banxico), which had kept its rate steady since June, also said it expects inflation to continue to decline for the rest of this year, with the trend then accelerating next year so inflation converges towards the bank’s 3.0 percent target towards the end of 2018.
Banxico has raised its rate by 400 basis points since December 2015 when the U.S. Federal Reserve began tightening its monetary policy for the first time since the global financial crises.
Mexico’s headline inflation rate rose slightly to 6.37 percent in October from 6.35 percent in September, continuing to drop from a high of 5.0 percent in August, as the central bank expected.
Core inflation in October was was steady at 4.8 percent and Banxico expects it to remain above 4.0 percent this year and then decelerate to moderately above 3.0 percent by the end of next year.
However, the central bank underlined its inflation forecast is subject to the risk of a fall in the peso’s exchange rate in the event of an “unfavorable evolution of the NAFTA negation process” or an adverse reaction to the normalization of monetary policy in the U.S.
After firming in the first half of this year, the peso has depreciated since late September and trading has turned more volatile in response to U.S. monetary policy, possible U.S. fiscal expansion and uncertainty regarding the outcome of NAFTA talks. The interest rate differential between the U.S. and Mexico has also risen, the central bank added.
U.S. President Donald Trump has threatened to withdraw from NAFTA if talks don’t lead to improved trading conditions for the U.S.
The peso was trading around 19.05 to the dollar today, still up 8.7 percent this year.
Mexico’s economy has slowed down this year, with Gross Domestic Product shrinking 0.2 percent in the third quarter from the second quarter for annual growth of only 1.6 percent, down from 1.9 percent in the second quarter and 3.2 percent in the first quarter.
Mexico holds rate, NAFTA poses risk to inflation, growth