Mexico's Central Bank Lifts Rates to 7% -- Update

By Juan Montes Features Dow Jones Newswires

The Bank of Mexico on Thursday lifted the overnight interest rate target by a quarter percentage point to 7%, the highest level since early 2009, and indicated that the tightening cycle that began in September has ended for now.

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It is the seventh consecutive time the central bank raised interest rates, and the fourth increase so far this year, amid a continued effort to tame rising inflation. The move was broadly expected, particularly after the U.S. Federal Reserve raised rates last week.

In its statement, the central bank made it clear it considers the current rate level as appropriate. "The reference rate has reached a level congruent with meeting the 3% inflation target," the bank said. One member of the board voted to keep rates unchanged.

The central bank said the rate increase sought to anchor inflation expectations and was motivated in part by last week's Fed move. Mexico's annual inflation hit a fresh eight-year high in early June at 6.30%.

A recovering peso, which has gained around 20% against the U.S. dollar since February, gave the central bank some room to signal the end of the rate-raising cycle. After the policy decision was announced, the peso slightly appreciated against the U.S. dollar.

"It appears that policy makers are increasingly of the opinion that their work is done," said Adam Collins, a Latin America economist with Capital Economists, a research consultancy.

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Still, the central bank said it would remain prudent, as upside risks to inflation remain. It also said it would be watching the monetary stance relative to the U.S. Some economists expect the bank to raise rates again if the Fed does, to keep the peso attractive for investors.

The Bank of Mexico has raised interest rates by 400 basis points since December 2015. Inflation started to climb last July as a weak peso started to affect inflation expectations. Then, in January, Mexico's government ordered an unprecedented 20% jump in gasoline prices, which in turn impacted transportation costs.

The bank expects annual inflation to be "considerably" above the 4% during 2017, start slowing down by the end of the year and meet the 3% target by the fourth quarter of 2018.

Many think the steep increase in borrowing costs, which weighs on consumption, could dent Mexico's economic growth prospects for the year. In its policy decision, the central bank said the economy showed signs of slowing down at the beginning of the second quarter, due to sluggish private consumption and investment.

In the first quarter, Mexico's economy showed resilience, expanding at an annualized rate of 2.7%, as exports benefited from a weak peso early this year that made local products more competitive abroad. The government sees economic growth at 1.5%-2.5% for this year.

Write to Juan Montes at juan.montes@wsj.com

(END) Dow Jones Newswires

June 22, 2017 16:00 ET (20:00 GMT)