MEXICO CITY: Mexico’s central bank raised its key interest rate on Thursday after Donald Trump’s US presidential election victory last week rocked the peso and global markets.
As expected by analysts, the bank lifted the rate by 50 basis points to 5.25 percent, saying in a statement that the election “led to an increase in volatility in financial markets of every region.”
“With this action, we seek to counter inflationary pressures and keep inflation expectations anchored,” the statement said.
The Mexican currency broke the psychological barriers of 20 and 21 pesos to the dollar last week on fears that Trump’s protectionist policies would hit the country hard.
After one of its worst weeks in two decades, the peso dropped under 21 this week, though it fell 0.48 percent on Thursday, ending at 20.70.
Sofia Santoscoy, market analyst at financial consultancy Bursametrica, said the peso recovered a little this week because Trump appeared to temper his campaign promises after his victory.
He suggested in a CBS television interview that he would only deport immigrants with criminal records and that the border wall could include “fencing” instead of pure concrete.
But most analysts in Mexico expected the bank to increase its rate to control inflation, which slightly exceeded the institution’s 3.0 percent ceiling this month, Santoscoy said.
“The goal of bank of Mexico is always price stability,” she told AFP.
The rate hike can calm the markets because it shows the bank “is willing to intervene and do everything possible to prevent volatility in the markets,” she said.
Trump has unnerved investors with his plan to renegotiate or scrap the North American Free Trade Agreement (NAFTA), a three-nation pact between the United States, Canada and Mexico.
He has also threatened to curb a major source of revenue for Mexico by cutting off remittances sent by immigrants to their families in order to strong-arm Mexico into financing the construction of a border wall.
The Mexican central bank said that while it is “still difficult” to know the details of the next administration’s economic policies, “the risks that they imply have had an important impact on the national financial markets.”
The national economy, it added, faces “high uncertainty.”
The bank said inflation could exceed its target of 3.0 percent in 2017.
The statement cited external risks that could further cause the peso to depreciate and harm inflation expectations.
Mexico’s government has sought to reassure investors about the impact of Trump’s election.
President Enrique Pena Nieto, who plans to meet Trump before the Republican billionaire’s inauguration on January 20, has said he was “optimistic” about the future of US-Mexican relations.
Hours after Trump’s election victory, Finance Minister Jose Antonio Meade said the government did not need to undertake “premature” measures as the country’s economy was robust enough to cope with the market upheaval.