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 Business News | April 2007 
Mexico Hikes Rates in Surprise Attack on Inflation
 Greg Brosnan & Jason Lange - Reuters
Mexico City Mexico tightened monetary policy for the first time in two years Friday, catching economists off guard with a surprise interest rate hike aimed at heading off inflation just as it seemed to be cooling.
The central bank unexpectedly raised its benchmark overnight interest rate by 25 basis points to 7.25 percent to stop food price hikes from spreading to other areas of the economy.
It said it saw a slight increase in 12-month core inflation in May, and that uncertainty has increased over prices of tortillas, a Mexican staple food, and grains.
The goal is to better balance inflation risks and stop the price increases ... affecting the setting of prices and wages, the bank said in a statement.
Economists had unanimously predicted the bank would hold rates steady after consumer prices fell in the first half of April, reeling 12-month headline inflation down to 3.96 percent, below the bank's 4 percent upper limit.
The tightening (would have) made more sense earlier in the year, said Alonso Cervera, an economist with Credit Suisse in New York. It is not clear that the balance of risks on inflation has worsened over the past four weeks.
In fact it has improved, he said. To me this is just a move by the central bank to try to restore some of its credibility that it lost when it didn't move before and I don't think this is the start of a tightening cycle, Cervera said.
BONDS BEATEN BACK
BBVA economist Jose Maria Barrionuevo called the hike a remarkably favorable decision that highlights the strong leadership of the central bank in proactively leading financial markets.
The pre-emptive and unexpected move makes it much more effective in ... ensuring that inflation expectations remain well anchored, he said in a report.
The benchmark IPC stock index fell sharply but later recovered to end the day up 0.10 percent. The peso finished near flat at 10.9140 per dollar.
The benchmark government 10-year peso bond fell 1.225 points to bid 102.251 and its yield surged to 7.64 percent, up from 7.45 percent late Thursday.
The surprise rate hike also knocked down domestic bonds all across the yield curve, from money market instruments to 30-year bonds.
We're still digesting this because it was a real surprise, said a local bond trader. A lot of banks were moving their inflation expectations down. This seems like a buying opportunity.
But he also added a word of caution.
This makes us think that the central bank knows something (we don't) and that's why it's reacting this way.
It was the first time the central bank had tightened monetary policy since March 2005.
The bank's last monetary policy move was an interest rate cut in April 2006.
The central bank held its inflation expectations steady, saying it expected 12-month headline inflation between 4 percent and 4.5 percent until the third quarter, and then easing slightly to the end of the year.
It also said it saw Mexican GDP growing at a 3 percent rate in the first quarter of the year.
Mexico's economy is slowing down due to subsiding demand for its goods in the United States, which buys most of the country's exports.
Mexican GDP grew 4.8 percent growth in 2006, the government expects economic growth to slow to 3.6 percent this year, and most analysts forecast it will grow much less.
(Additional reporting by Noel Randewich and Sandra Morales) |
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