December 20, 2018 / 7:54 PM / 6 months ago

UPDATE 2-Mexico central bank hikes rates, cites increased uncertainty

(Adds central bank comments, background details)

By Anthony Esposito

MEXICO CITY, Dec 20 (Reuters) - Mexico’s central bank hiked its benchmark interest rate by 25 basis points on Thursday, as expected, warning of uncertainty caused in part by the new leftist government’s economic policies, as well as the risk of higher inflation.

In a unanimous decision, the Bank of Mexico’s board voted to raise the overnight interbank rate by 25 basis points to 8.25 percent, its highest level since August 2008.

A Reuters poll of analysts had forecast the bank would hike the rate by a quarter of a percentage point.

Before taking office this month, President Andres Manuel Lopez Obrador rattled financial markets when on Oct. 29 he decided to scrap a partly built $13 billion new Mexico City airport on the basis of a referendum that was widely questioned.

“The Mexican peso exchange rate continued to reflect the uncertainty regarding the policies of the new administration,” the central bank said in a statement.

“Additionally, sovereign risk premia and interest rates for the medium and long terms in Mexico showed sizeable increases, which have partially reverted but still remain at high levels.”

The peso weakened sharply after Lopez Obrador’s decision to scrap the airport project.

Market sentiment was also hammered by a bill drafted by Lopez Obrador’s National Regeneration Movement (MORENA) to limit bank fees and another to regulate the mining sector.

The bank said that inflation faced “structural risks” stemming from policies the government could adopt.

“The current environment poses significant risks in the medium and long terms that could affect the country’s macroeconomic conditions, its potential growth, and the economy’s price formation process.”

Earlier this week, Mexico’s wage commission said it planned to hike the minimum wage by 16 percent to around $5 a day, and Lopez Obrador pledged further increases to keep up with inflation.

Banxico warned the proposed minimum wage increases could “bring about wage revisions that exceed productivity gains and create cost pressures, affecting formal employment and prices.”

The central bank said it was ready to act if risks to inflation, including pressure from a weak peso, materialized.

The balance of risks to economic growth continues biased to the downside and has deteriorated, the bank added. (Reporting by Anthony Esposito Editing by Christine Murray and Jonathan Oatis)

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