LATIN AMERICA

Mexico bumps up interest rate in bid to rein in inflation

As currency tumbles, central bank raises level to 4.75%, the highest since 2009

The Mexico peso has been in freefall in recent times.
The Mexico peso has been in freefall in recent times.Sáshenka Gutiérrez / EFE

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The Bank of Mexico has announced it will hike borrowing costs from 4.25% to 4.75% in a bid to check inflation and stop the peso’s fall in value against the US dollar.

The new rate of 4.75% is the highest since the dark days of the global economic crisis in 2009, and is the second such move by Mexico’s central bank in a matter of months. In June, the institution jacked up the interest rate from 3.75% to 4.25% on the back of the economic uncertainty stirred up by Brexit and because of fears currency depreciation would lead to rampant inflation.

In a statement issued on Thursday, Mexico’s central bank, which is headed up by the economist Agustín Carstens, said the latest rise in rates was aimed at keeping inflation expectations “anchored” and providing greater financial stability.

The institution had taken the step because the Mexican peso – one of the most heavily traded currencies in the world – had proven to be highly volatile against emerging currencies and in the context of possible future falls in the price of petroleum, the statement read.

The central bank has made repeated assurances that inflation would not break through the 3% barrier but said in Thursday’s statement that figure would be slightly exceeded at the end of the year.

The central bank hopes the rise in borrowing costs will provide greater economic stability

The recent dramatic tumble of the peso saw the currency hit record-low levels recently, falling through the 20 pesos per dollar floor on September 19 spurred on by falling oil prices and tensions caused by the upcoming presidential election in the United States.

That decline in value has now begun to have a flow-on effect on inflation despite Mexico’s inflation rate having remained at historic low levels over the last 12 months.

Making its decision to raise interest rates, the Bank of Mexico looked at the US Federal Reserve’s recent call not to shift its own rate. But the institution also took note of suggestions by Fed president Janet Yellen about a possible rate rise in December, while the upcoming US presidential elections in November were factored in.

English version by George Mills.

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