Mexico CB hikes rates to over 7-year high as US election sinks peso

MEXICO CITY: Mexico’s central bank hiked interest rates to their highest in over 7 years on Thursday and warned that the election of Donald Trump as US president had cast doubt on the direction of Latin America’s second-largest economy. The Banco de Mexico raised its key rate 50 basis points (bps) to 5.25 percent, its highest since May 2009.

The move had been expected by the median of 15 analysts polled by Reuters from the end of last week. But the market later tilted toward a hike of at least 75 bps and the peso closed down just over 1 percent.

“The market was expecting a bit more,” said Alfonso Esparza, a strategist at Oanda in Toronto, who still thought the 50 bps hike was the right move due to the risk to growth from Trump’s threat to unwind a free trade deal with Mexico.

“It is still very early to know what could be the effect of the new policies of President-elect Trump,” he said. “The central bank could end up risking too much before it really knows what will happen with Trump’s promises.” The central bank said the outcome of the US election could affect the relationship with Mexico, on top of further episodes of global volatility.

“The current environment facing the national economy is characterized by greater uncertainty,” it said, adding that “the new international environment” suggested that economic growth could be weaker going forward. The peso slid to a record low last week as Trump swept to power, posting its biggest two-day loss since a 1995 devaluation.