Mexico: Central bank raises rates by 25bp, MXN gains momentum

The Bank of Mexico rose rates by 25 basis points to 6.75%, highest since March 2009. Market consensus pointed to no change in rates, but the move was expected by some analysts. The Mexican peso rose in the market after the decision. 

USD/MXN dropped to 18.78 following Banxico, hitting a fresh daily low. It has been a volatile day for the pair that earlier today rose above 19.20. From the highs, it dropped more than 2%. The Mexican peso went from testing weekly highs, to move closer to the key support area around 18.50/60. 

Banxico surprises 

On a unanimous decision, the central bank of Mexico continue with its tightening policy and rose the interest rate to 6.75%. The recovery of the Mexican peso, the Fed keeping rate on hold in May and the duration of the tightening cycle, were behind expectations of no change in rates. But inflation continued to rise and reached in April 5.82%, the highest in almost eight years and above the 2-4% target. 

Banxico’s officials expect inflation to remain above the target during 2017. They mentioned in the statement that the main challenge they face is to avoid second-round effects on price formation and keeping inflation expectation anchored. 

According to the central bank, the balance of risks to growth has a downward bias. Despite the improvement in the global outlook, they still have doubts.