Bank of Mexico Holds Rates, Betting Inflation Will Soon Peak -- Update

By Juan Montes Features Dow Jones Newswires

The Bank of Mexico stood pat on interest rates Thursday, as widely expected, betting that a recent surge in consumer prices is close to a peak.

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Mexico's central bank left its overnight interest-rate target unchanged at 7% after seven consecutive rate increases that put borrowing costs at their highest level since early 2009. The decision was unanimous among voting members.

Inflation hit a more than eight-year high in July at 6.44%, well above the central bank's 3% target, as a result of a big increase in gasoline prices earlier this year and a recent pickup in agricultural prices.

But in its policy statement, the central bank said inflation "seems to be nearing to a peak." The bank expects inflation to start slowing down late this year and approach the target by the end of 2018.

A recovering peso and less financial volatility also gave the central bank room to stop raising rates.

Most economists agree that inflation will peak soon, and expect the central bank to remain on hold for some time, with the next move being a rate cut in June 2018.

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The Bank of Mexico said it would maintain a "prudent" policy to ensure inflation expectations remain under control. The bank also said it is watching the relative monetary stance between Mexico and the U.S., which some economists take to mean the bank could raise rates again if the Federal Reserve does.

"The cautious tone of the statement will temper hopes that policymakers might soon shift to an easing bias," said Neil Shearing, chief emerging-markets economist with Capital Economics.

The central bank said the economic growth outlook has improved, as investors increasingly believe Mexico and the administration of U.S. President Donald Trump can reach agreements on a bilateral agenda -- including the renegotiation of the North American Free Trade Agreement.

Mexico's economy outperformed expectations in the first half of the year. At the beginning of the year, many believed the mix of Mr. Trump's antitrade rhetoric, budget cuts and rising inflation would slow down economic activity. But the economy expanded at an annualized rate of 2.6% in the first half of the year, helped by solid manufacturing activity and resilient domestic demand.

Bank of Mexico Gov. Agustín Carstens has only two more meetings at the helm of the central bank before leaving at the end of November to head the Bank for International Settlements. President Enrique Peña Nieto is expected to propose a new central bank governor to the Senate sometime between September and November.

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

(END) Dow Jones Newswires

August 10, 2017 15:33 ET (19:33 GMT)