Mexico: Falling peso worries central bank after Brexit

By Nancy Caouette

MEXICO CITY (Reuters) – The U.K.’s decision to leave the EU, which has caused instability on financial markets, has raised the possibility of an interest rake hike in Mexico, according to minutes of the central bank’s meeting in Mexico City released Thursday.

The Brexit vote spiked fears that Mexico’s plummeting peso could plunge even further due to the market volatility.

During the most recent bank meeting at the end of June, following the Brexit vote, policymakers unanimously decided to raise its key interest rate by 50 basis points to 4.25 percent as it said the country is facing growing deficits and inflation.

The board of the bank had already raised the rate half a point at a meeting in February.

Both rate hikes surprised economists who expected a lowering of the rate.

“We will continue to act with flexibility and opportunity on monetary policy in the face of any factor that threatens the consolidation of the convergence of inflation,” according to the minutes.

Inflation has stayed below the bank’s 3 percent target in the last year, recording an unexpected slow-down in June.

The minutes reveal policymakers raised the interest rate in order to protect the purchasing power of the peso and rates could be hiked again in the coming months, if needed.

Bankers said in the minutes that the result of the Brexit vote – which plunged Mexico’s currency to record lows – can lead to more instability on financial markets.

Mexico’s growing current account gap – the widest in 17 years – has led several analysts to predict that the central bank could soon act again on interest rates.

The peso strengthened 0.13 percent to 18.34 pesos at Thursday’s closing.

In 2015, the peso lost 16.8 percent to the dollar.