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UPDATE 1-Mexican central bank aggressively hikes rates after peso slump
December 15, 2016 / 8:10 PM / a year ago

UPDATE 1-Mexican central bank aggressively hikes rates after peso slump

(Updates with details from statement, background)

By Gabriel Stargardter and Michael O‘Boyle

MEXICO CITY, Dec 15 (Reuters) - Mexico’s central bank on Thursday aggressively hiked its benchmark interest rate in a bid to cool quickening inflation after the peso fell to record lows in the wake of Donald Trump’s Nov. 8 U.S. election victory.

The Banco de Mexico hiked its main interest rate by 50 basis points to 5.75 percent, more than the median forecast by a Reuters poll of economists, taking it to its highest level since April 2009.

The central bank has raised rates five times this year, lifting borrowing costs by a cumulative 250 basis points. Policymakers on Thursday said the hikes would help push the rising inflation trend back down by 2018.

The peso reversed losses on the announcement, gaining around 0.25 percent to 20.42 pesos per dollar.

The move came a day after the U.S. Federal Reserve raised interest rates by a quarter point and signaled a faster pace of increases in 2017 as the Trump administration takes over with promises to boost growth through tax cuts, spending and deregulation.

The Mexican central bank’s statement on Thursday was permeated with references to the impact of Trump’s victory, which has upended expectations for Mexico’s economy.

“The environment facing the national economy right now is characterized by doubt related ... to the possibility that in the United States they pass economic policies that hamper trade and investment,” the Mexican central bank said.

It added that the U.S. election result had increased the risks of the United States adopting policies that could negatively impact the bilateral relationship with Mexico.

It also said it believed the balance of risks to both growth and inflation had deteriorated further, adding that inflation would rise close to the upper end of the central bank’s 4 percent limit by the end of 2017. In 2018, it said, inflation would start to trend back toward its 3 percent target.

Last week, data showed Mexico’s annual inflation in November reached its highest level in two years.

But the central bank flagged one positive development, noting the favorable results of this month’s deep-water oil tender demonstrated that the government’s structural reforms, particularly those in the energy sector, could generate good results.

The peso slid to a record low in the wake of Trump’s victory, posting its biggest two-day loss since a 1995 devaluation.

The U.S. Republican candidate had threatened during the election campaign to unwind a free trade deal with Mexico and block the money sent home by Mexican immigrants to pressure the country to pay for a border wall.

“In the (bank‘s) statement, we’re starting to see the difference between Donald Trump the candidate and Donald Trump the president-elect,” said Alfonso Esparza, a currency strategist at Oanda in Toronto. “There’s less doubt, but still the risk that his campaign promises become reality.” (Reporting by Gabriel Stargardter; Editing by Alistair Bell and Paul Simao)

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