November 15, 2018 / 10:00 PM / 9 months ago

Mexico central bank sends warning over incoming leftist government

MEXICO CITY (Reuters) - Mexico’s central bank raised its benchmark interest rate on Thursday on concerns over inflation, and said the incoming government’s policies risked fanning inflation in a strongly worded warning to President-elect Andres Manuel Lopez Obrador.

The bank said another rate hike was possible.

The Bank of Mexico lifted its overnight interbank rate MXCBIR=ECI by 25 basis points to a nearly 10-year high of 8.0 percent, as expected by economists. It was a divided decision, with one member calling for a 50-point hike.

Mexico’s peso and the stock market have been rattled by concerns Lopez Obrador’s administration will move away from the orthodox fiscal policies advocated by the central bank.

The bank said in a statement it had raised rates because the outlook for inflation had “deteriorated significantly.”

“Inflation faces significant risks related to the possible adoption of policies that could structurally affect the economy’s price formation process,” it said.

The peso MXN= traded about 1 percent stronger after the announcement.

The currency weakened sharply after Lopez Obrador, a veteran leftist, decided on Oct. 29 to scrap a $13 billion, partially-built new airport for Mexico City.

The peso was hurt by that decision and “in general by markets’ concerns regarding both the incoming administration’s policies and some legislative initiatives,” the bank said.

A bill drafted by Lopez Obrador’s MORENA party to limit bank fees hammered market sentiment last week.

“The Bank of Mexico reiterated its concerns about the policies of the new administration and its legislative agenda and its impact ... but now they are being more explicit and this is going to have an impact,” said New York-based Joel Virgen, chief economist for Mexico and Colombia at BNP Paribas.

Many banks are forecasting a weaker peso this year and next year and lower growth, partly because of uncertainty about economic policy under Lopez Obrador, who takes office on Dec. 1.

The Bank of Mexico described how rating agencies downgraded Mexico’s sovereign risk outlook from stable to negative and, in turn, sovereign risk premia and medium and long-term interest rates rose.

That environment “entails significant medium and long-term risks” to Mexico’s macroeconomic conditions and its growth potential, the central bank said.

The bank said it would take any necessary action, including holding rates or hiking again, to insure inflation falls back toward its goal. The bank targets inflation of 3.0 percent, plus or minus 1 percentage point.

Mexico’s annual inflation rate was 4.9 percent in October.

Reporting by Michael O'Boyle and Dave Graham; Additional reporting by Sheky Espejo; Editing by Leslie Adler and Grant McCool

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