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Talking Points:

• Mexican Central Bank members unanimously voted to raise interest rate by 50 basis points

• Mexican Peso depreciation and inflation pushed Banxico members to double down on policy

• Members see consumer price index reaching 3% growth by 2018, weak Peso seen as a risk

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The Mexican central bank released minutes from its most recent policy meeting where members voted unanimously to raise interest rates by 50bps. The hike was 25bps more than expected, adding a sense of urgency to raise rates, as echoed in the meeting minutes. Banxico members noted that a hike was necessary even if the Federal Reserve choose to hold its own rates in December. Banxico members stated that it was important to double down to keep prices stable, with their main focus being inflation and risk to government finances.

Inflation was a major theme in the minutes, as Mexican Peso depreciation was seen as the main risk to CPI. The US presidential election and the subsequent depreciation in the peso have impacted consumer prices, as some members are concerned it could also affect long-term forecasts. In the near-term, most members see higher inflation as transitory and likely to converge at 3 percent in 2018. Another key point that members identified was the impact of central bank actions and the exchange rate on increasing sovereign debt risk.

After the release of the minutes, the USD/MXN exchange rate was little moved. Around the time of the back-to-back US (Federal Reserve) and Banxico rate decisions – on December 14th and 15th respectively – the exchange rate reported a substantial reaction. The peak low to high response to the Fed hike results in a near 2.5 percent climb for the pair. With the half-a-percent hike from the Mexican policy authority the day after, it retreated as much as 1.9 percent from that 24 hour period high.

original source

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