Mexico central bank hikes key rate, says ready to act again

Mexico central bank hikes key rate, says ready to act again
(Adds central bank, analyst comments)

MEXICO CITY, Dec 14 (Reuters) - Mexico's central bank raised borrowing costs on Thursday in the face of intensifying inflation pressures and said it was willing to act again whenever needed in order to rein in the jump in consumer prices.

With new governor Alejandro Diaz de Leon at the helm for the first time since the departure of Agustin Carstens last month, the Banco de Mexico board raised its key rate by 25 basis points to 7.25 percent, its highest in nearly nine years.

A majority of analysts in a Reuters poll expected the quarter-point hike, while others thought the bank would stand pat.

Three members voted for the 25-basis-point move in order to anchor inflation expectations, while one member called for an even bigger 50-basis-point increase, the bank said.

The peso briefly reversed losses after the decision, which matched a rate hike by the U.S. Federal Reserve this week.

Board members warned that concerns the United States could pull out of a trade deal with Mexico, as well as jitters ahead of the 2018 presidential election in Latin America's No.2 economy, could batter the peso.

"Due to the intensification of the risks that could affect inflation, the board will be vigilant and, if necessary, will take the corresponding actions, as soon as it is required" to achieve convergence toward the bank's 3 percent target, the bank said in its post-meeting statement.

Many analysts had expected Diaz de Leon to burnish his inflation-fighting credentials since his previous position at the finance ministry led some to believe he would favor lower rates to foster growth and keep government financing costs down.

"It's clear that Banxico has re-doubled its focus on inflation. If the peso were to fall again next year – either on NAFTA or election concerns – it wouldn't take much for the central bank to move again," said Neil Shearing, chief emerging markets economist for Capital Economics.

Mexico had not moved its benchmark rate in the last three decisions. The central bank has now raised borrowing costs by 425 basis points since the end of 2015 to counter the impact on inflation from repeated slumps in the peso.

The board warned on Thursday that the annual rate could take longer to close in on the bank's target, but said the annual figure should still be close to 3 percent by the end of 2018.

Mexican annual inflation accelerated to 6.63 percent in November, the steepest rate since August when it hit the highest level in 16 years. The board said on Thursday the rate would end the year above November's level.

On the day of his nomination late last month, Diaz de Leon tipped his hand toward a hike in an interview with Reuters, warning inflation may not fall as fast as forecast. (Reporting by Michael O'Boyle and Gabriel Stargardter; Editing by Matthew Lewis and Susan Thomas)

First Published: 2017-12-14 21:41:03
Updated 2017-12-14 22:39:26

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